Solo 401(K)
A Solo 401(k), also known as an Individual 401(k), is designed for business owners with no eligible employees other than a spouse. It can provide significant retirement contribution flexibility because the business owner may contribute in both an employee and employer capacity.
Depending on the plan design, a Solo 401(k) may also include Roth contributions and participant loan provisions, providing features that are not available with some other retirement plan options.
SkyOak Capital helps business owners evaluate whether a Solo 401(k) is appropriate, establish and invest the plan, and coordinate it with their broader retirement and financial planning.
Who May Benefit From a Solo 401(k)?
A Solo 401(k) may be appropriate for self-employed individuals and owner-only businesses, including sole proprietors, independent contractors, consultants, LLC owners, S corporation owners and partners in a business without eligible employees.
A business owner may also be able to establish a Solo 401(k) for self-employment income while participating in a retirement plan through another employer. Contribution limits and coordination between plans must be considered when determining how much can be contributed.
If a business later hires eligible employees, the retirement plan may need to be changed to accommodate them.
Solo 401(k) vs. SEP IRA
Both Solo 401(k) and SEP IRA plans can provide valuable retirement savings opportunities for business owners, but there are important differences:
Contribution Opportunities. A SEP IRA allows employer contributions. A Solo 401(k) allows the business owner to contribute in both an employee and employer capacity, which can provide greater contribution opportunities at certain income levels.
Roth Contributions. A Solo 401(k) can include a Roth option, providing additional flexibility for business owners who want to make after-tax retirement contributions. Roth treatment may also be available for certain SEP IRA contributions, depending on the arrangement and provider.
Participant Loans. A Solo 401(k) can permit participant loans if the plan document allows them. A SEP IRA does not permit participant loans.
Catch-Up Contributions. A Solo 401(k) allows eligible participants to make catch-up contributions in addition to regular employee deferrals. SEP IRAs do not have a comparable employee catch-up contribution because contributions are made by the employer.
Administration. A Solo 401(k) requires a formal plan document and has additional administrative and filing requirements as plan assets grow. A SEP IRA is generally simpler to establish and administer.
For business owners who want greater contribution flexibility, Roth options or access to a participant loan feature, a Solo 401(k) may offer advantages. For owners who prioritize administrative simplicity, a SEP IRA may be appropriate.
How SkyOak Helps
SkyOak works with business owners and their other professionals to help establish and manage a Solo 401(k). Depending on the engagement, our work may include:
- Plan Evaluation & Setup— Helping determine whether a Solo 401(k) is appropriate and coordinating establishment of the plan.
- Contribution Planning— Helping business owners understand employee and employer contribution opportunities in coordination with their tax professional.
- Investment Management— Managing the plan’s investments based on the owner’s goals, time horizon and risk tolerance.
- Retirement Planning— Coordinating the Solo 401(k) with the owner’s other retirement accounts and broader financial plan.
- Ongoing Coordination— Helping the owner stay aware of plan requirements and coordinating with the appropriate tax and plan professionals as needed.
Fees
Solo 401(k) fees depend on the services provided and assets managed. Fees are disclosed in writing before an engagement begins.
Plan document, custodial, administrative and other third-party expenses may be separate. Complete information about SkyOak Capital’s fees is available on our fees page and in the firm’s Form ADV.
Your Advisor
Solo 401(k) planning is provided by SkyOak Capital’s wealth advisors as part of our retirement and investment planning services for business owners.
Damien Rennie, Senior Wealth Advisor & Director of Employer Retirement Plans and Self-Directed IRA Services, leads SkyOak Capital’s Employer Retirement Plans practice from our Medford, Oregon office.
Jennifer Davis, CFP®, Founder & CEO, also works with business-owner clients to evaluate, establish and manage Solo 401(k) plans as part of their broader investment and financial planning.
FAQs
Questions About Solo 401(k) Plans
Can I have a Solo 401(k) if I already have a 401(k) through my employer?
Potentially, yes. If you also have a separate business with self-employment income and meet the eligibility requirements for a Solo 401(k), you may be able to participate in both plans. Certain contribution limits apply across plans, so the contributions should be coordinated with your tax and retirement plan professionals.
Can my spouse participate in my Solo 401(k)?
Yes, if your spouse earns compensation from the business and otherwise qualifies under the plan. A one-participant 401(k) can cover a business owner and the owner’s spouse.
What happens if I hire employees?
If employees become eligible to participate, the plan can no longer operate as a one- participant plan. The business may need to extend plan participation to eligible employees and comply with the requirements applicable to a traditional 401(k) plan.
Can a Solo 401(k) have a Roth option?
Yes. A Solo 401(k) may be designed to permit Roth contributions. Whether a Roth contribution is appropriate depends on the owner’s tax situation and retirement strategy.
Can I borrow from my Solo 401(k)?
Potentially. A 401(k) plan may permit participant loans if the plan document includes a loan provision. SEP and SIMPLE IRA plans do not permit participant loans.
Does a Solo 401(k) have annual filing requirements?
It can. A one-participant plan generally becomes subject to Form 5500-EZ filing requirements when combined one-participant plan assets exceed the applicable IRS threshold, and a final filing is generally required when the plan is terminated. SkyOak can help clients identify when they should coordinate with their tax or plan professional regarding filing requirements.