Saving for retirement is important, but if you’re self-employed, you don’t have the benefit of an employer-sponsored 401k. This can be a disadvantage, especially if you let too many years go by without investing in your retirement.
The good news is that a solo 401k may be an option if you own your own business but don’t have employees. Here’s how they work and the five best solo 401k companies to consider.
What Is a Solo 401k?
A solo 401k is a retirement account for entrepreneurs. You can’t use it if you have full-time employees but can have a solo 401k for you and your spouse.
There are minimum age requirements, and you don’t have to make a certain amount of income to be eligible. Depending on how you want to handle your taxes, you can choose a traditional 401k or Roth 401k option.
All you need to open an account is an Employer Identification Number and to meet the above requirements.
Here’s how it works.
You contribute as both the employee and employer. Your employee contributions can be up to 100% of your income or $22,500, whichever is less. Then, you can contribute up to 25% of your compensation as the employer.
Keep in mind, though, if you’re doing this as a side gig and you have a 401k at work, your total contributions are across all 401k plans; they are not per plan.
- Higher contribution limits – A solo 401k has much higher contribution limits than an IRA. You can contribute up to $66,000 in 2023, and if you’re 50 or older can contribute an additional $7,500 as a catch-up contribution.
- Traditional or Roth options – You choose the type of account and whether you want to get the tax advantages today or during retirement. Traditional 401k contributions reduce your tax liability today, but you pay taxes in retirement. Roth 401k contributions are after-tax, but you don’t pay taxes on your withdrawals during retirement.
- Loans available – You can borrow up to $50,000 or half of your retirement account, whichever is less, to use for business funds or to pay personal expenses. You don’t have to qualify, and the interest rate is lower than most loans.
5 Best Solo 401k Providers in September 2023
1. Charles Schwab Individual 401k
Best for Beginners
The Charles Schwab Individual 401k is a great way to start your retirement savings. With no setup or recurring fees, and commission-free trades, it’s easy for beginners to start without losing money to expenses.
However, experienced investors should use caution. The charting and analysis tools leave much to be desired for expert investors, and there’s no option for a solo 401k loan with this broker.
Charles Schwab offers many great features, including the following:
- Low fees – As discussed above, starting an Individual 401k at Charles Schwab is free, and there aren’t any ongoing fees to maintain the account.
- Investment options – Invest in stocks, mutual funds, ETFs, options, bonds, and futures. You can even invest in fractional shares.
- Automated option available – If you have at least $5,000 invested, you can opt-in to Schwab Intelligent Portfolios, Schwab’s version of a robo-advisor, and have investments handled for you.
- Human advisor option available – If you have at least $25,000 invested, you can have access to a human advisor; however, there is a cost.
As I discussed above, the fees are low, with no fees for setup or maintenance. Stocks and ETFs trade commission-free, and there are 4,000+ funds with no transaction fees available. However, if you want to trade over the phone, automated trades are $5 each, and if you use broker assistance, it’s $25 each.
2. E*Trade Solo 401k
For the Experienced Trader
E*Trade is a broker with a lot of history, so much so that most people have heard of it before. Today, it’s a part of Morgan Stanley, so even more features are available for investors. It’s most well-known for active traders who want to save on fees, but there are options for beginning traders too.
- Choose traditional or Roth accounts – E*Trade offers the option to open a traditional or Roth account, giving you choices to handle your retirement savings.
- Low fees – E*Trade is known for its commission-free trades. There also are fees to open or maintain the account.
- Investment options – Investors can choose from commission-free stocks and ETFs as well as 4,400 no-load and no transaction fee mutual funds. Experienced investors can also choose futures, options, and fixed-income assets to diversify further.
- Choose hands-on or hands-off trading – You can manage your portfolio yourself (great for experienced investors) or pay a fee for E*Trade to handle your investments for you.
- 401k loans – E*Trade offers the option to borrow against your 401k as needed.
I discussed E*Trade’s limited commission and trading fees, but here’s a quick rundown:
- Stocks, mutual funds, and ETFs – $0
- Options – $0.65 per contract
- Futures contracts – $1.50
- Bonds – $1 per bond
If you choose a managed portfolio, you’ll pay 0.30% of assets under management annually.
3. My Solo 401k Financial
For the Risk Taker
My Solo 401k isn’t as well known, but it’s a popular option for risk-tolerant investors. The investment options are incredibly diverse, and they offer mega backdoor Roth investing. Despite not being a household name, the owners have 30 years of experience managing 401ks.
- Wide range of investment options: You can invest in stocks or ETFs, like most brokerages, but also have the option to invest in real estate, promissory notes, tax liens, crypto, and more.
- 401k loans available: You can borrow against your solo 401k to fund your business expenses and grow your business.
- Audit protection: My Solo 401k professionals will help you file required documents and update necessary information to ensure compliance.
My Solo 401k charges flat fees and is transparent with all costs upfront.
Opening an account costs $525 plus a $125 annual fee. These fees include all necessary reporting and provider fees.
4. Fidelity Self-Employed 401k
Best for Investment Flexibility
Fidelity is another household name for retirement and investment accounts. They charge low fees and have diverse investments, giving investors many options. It’s an old-school investment firm that may lack some basic technology upgrades, but with its low fees and extensive investment options, many investors prefer it.
- Wide investment selection – Investors can choose to invest in stocks, ETFs, and 3,400 no-load mutual funds.
- Low fees – Many new investors can get by without paying any trading fees by trading no-commission investments
- Fractional shares – You can trade fractional shares, which makes it easier to invest in the assets you want, even if you only have a little money invested
- Retirement tools – Fidelity offers retirement tools, including calculators and other tools for support
Fidelity doesn’t charge fees to open or close an account. They also don’t charge annual maintenance fees. Many of their investments, including stocks and ETFs, also trade commission-free.
However, if you need assistance with trades, they charge a $34.95 per trade fee.
If you prefer Vanguard investments, opening a Vanguard account and taking advantage of the commission-free trades makes sense. However, if you trade anything other than Vanguard, the fees may be more than you bargained for.
- Traditional and Roth options – Investors can take the tax advantages they contribute in the year or during retirement but choose between a traditional or Roth account.
- Many investment options – Vanguard offers 100+ mutual funds and ETFs without commission fees.
- No fee to open an account – It’s free to open a Vanguard account, making it easy for new business owners to start investing in retirement immediately.
Fees are an area in which Vanguard falls behind other 401 companies.
They charge a $20 annual fee per fund unless you have a balance of $50,000 in Vanguard assets.
Pros & Cons of a Solo 401k
Like all retirement accounts, there are pros and cons of the solo 401k that you should understand.
- Self-directed investments – You can choose where to invest your funds. You aren’t restricted to the investments the plan sponsor offers since you are the plan sponsor.
- Higher contribution limits – You can contribute much more to your retirement account than with an IRA.
- Works even with side gigs – If you run a side gig, you can have a solo 401k and contribute until you hit the maximum across all accounts.
- Complex paperwork – Unlike a 401k, you’re responsible for all paperwork for the solo 40k, which can get overwhelming.
- No employees – If you have employees in your business, you’re ineligible for a solo 401k.
- Regular contributions – The IRS requires you to make substantial and recurring contributions to keep the account active.
Traditional Solo 401k vs. Roth Solo 401k
Like most retirement accounts, you can choose between a traditional and Roth solo 401k.
Here’s the difference.
With a traditional solo 401k, you contribute funds pre-tax. This lowers your tax liability today and defers your taxes owed. You’ll pay taxes on your contributions and earnings when you withdraw funds in retirement. You’ll pay taxes at your tax rate during retirement, which may be lower.
Roth solo 401k contributions are after tax. So you pay taxes on the funds you contribute, but your earnings and contributions grow tax-free, not tax-deferred. This means you don’t pay taxes when you withdraw the funds in retirement.
It’s best to talk to your tax advisor about which option is best for you to maximize your income in retirement.
Frequently Asked Questions
Here are some common questions business owners have about opening a solo 401k.
Can I Borrow from My Solo 401k?
Not all companies allow you to borrow from your solo 401k. If you need to borrow from your retirement account, ensure the company allows it. If you withdraw funds earlier than retirement age instead of a loan, you’ll pay a 10% penalty plus applicable taxes.
Who Should Get a Solo 401k?
You are only eligible for a solo 401k if you own a business and don’t have any employees. The only exception is if you are married. You and your spouse can have a solo 401k, but you cannot have one with employees and contribute to them.
Should I Choose a Traditional or Roth Solo 401k?
The choice between a traditional or Roth solo 401k comes down to the tax benefits. Traditional 401ks provide tax benefits now. So you’ll have a lower tax liability now but pay taxes in retirement. This works well for those who think their retirement tax bracket will be lower.
However, a Roth 401k offers more tax benefits because your contributions and earnings grow tax-free. You don’t have to worry about paying taxes in retirement; any money you withdraw is yours. Most people have a mix of traditional and Roth accounts to get the best of both worlds.
Is It Possible to Put 100% Of My Income in a 401k?
No, you cannot put 100% of your income in a 401k. The limits of $66,000 per year pertain to all 401k accounts in your name.