If you’re self-employed or an owner-only business, you too can have a 401(k) plan. It’s called a Solo 401(k) and it enables you to take full advantage of the flexibility a 401(k) plan offers. In fact, you can shelter up to $61K from 2022 taxes – $67.5K if you are 50+ years of age. That’s pretty powerful and might even drop you a tax bracket.
Once you know you want to start a Solo 401(k), there is an important decision to make. Which type? There are typically two types of individual 401(k) plans to consider:
- Self-administered 401(k) plan -- also referred to as a self-directed 401(k)
- Fully administered 401(k) Plan
A self-administered 401(k) typically has a lower setup price versus a fully administered plan. However, it may have transaction fees for every trade you make as well as other fees that are often included in the fully administered version. A self-directed 401(k) plan can offer a lot of investment choices of stocks, bonds, mutual funds, and ETFs similar to a retail brokerage account.
Fully administered plans tend to have a set line-up of diversified funds like 401(k) plans designed for businesses with employees. A fully administered Solo 401(k) is also generally easier to convert to a 401(k) plan that can accommodate employees if you plan to start hiring.
This chart can make it a bit easier to determine which is right for you:
|Features / Pricing||Self-Administered||Fully Administered|
|Supports multiple owners and/or spouse||No, unlikely||Yes|
|Roth 401(k) Option||Some||Yes|
|Loan Option||No, unlikely||Yes|
|Tax Form 5500 Preparation (required for $250K+ balanced)||Not included, $200+ fee typical if you use a tax specialist||Included, $0|
|Transaction Fees||Yes, per mutual fund or trading charge is common||No, $0|
|Setup||$0 - $50 is common||<$250 is common|
(may be charged annually or quarterly)
|$0 to $10 is typical||$0-$25 per owner
(money balance helps lower)
|Investment Options||Large Selection, Sophisticated Investors||15-25 diversified funds|
So if you expect to add employees in the next year or have multiple owners now, a fully administered plan is likely a better fit. If you ever think you may need access to funds via a penalty-free loan or want to take advantage of Roth contributions; again, fully administered is likely better. If you prefer a slimmed down selection of investments tailored for long-term investing, a fully administered plan helps here too. Note, try to ensure the investments have fund expense ratios well below 1%.
If you are self-employed for the foreseeable future, a sophisticated investor that is happy managing your tax reporting and don’t need any of the other bells and whistles, a self-administered solo 401(k) is most likely the best fit for you.
This blog was updated for 2022 contribution limits.