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Selecting the best solo 401(k) for owner-only businesses

04/14/2011:

If you’re an owner-only business, you can take full advantage of the flexibility a 401(k) offers you and shelter up to $49K from 2011 taxes -- $55K if you are 50+ years of age. That’s pretty powerful.

However, there is an important decision to make. Which type? There are typically two types of individual 401(k) plans to consider:

  1. Recordkeeping only 401(k) plan -- also referred to as a self-directed 401(k)
  2. Fully Administered 401(k) Plan

A recordkeeping only 401(k) typically has a lower setup fee versus a fully administered plan. But, it does 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 offers 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.

This chart can make it a bit easier to determine which is right for you:

Features / Pricing Recordkeeping Only Fully Administered
Supports multiple owners and/or spouse No Yes
Roth 401(k) Option Unlikely Yes
Loan Option No Yes
Tax Form 5500 Preparation (required for $250K+ balances) No, $150-$200 fee typical Included, $0
Transaction Fees Yes, $8 to $15 per trade online common No, $0
Setup $0 - $50 is common <$250 is common
Monthly Administration $0 or $2.50 common ($25 annual fee) $0-$25 per owner
Investment Options Large Selection, Sophisticated Investors 15-20 diversified funds

So if you expect to add employees in the next year or have multiple owners now, a fully administered plan is 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 better.

But 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 recordkeeping only solo 401(k) could be right for you.

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