Navigating retirement savings can be tricky. This is especially true for self-employed professionals and small business owners choosing a solo 401k.
Solo 401(k) plans help sole proprietors, solo entrepreneurs, and freelancers save for retirement while lowering taxes. You can create a retirement plan that can change to a traditional 401(k) if you hire employees.
However, the capabilities of different Solo 401(k) companies vary widely.
In this article, we'll explore the key features to look for and compare the top solo 401(k) providers fees, and services. We will focus our review on standard providers. We will save the more complex checkbook control options for another blog post.
We aim to help you choose the right Solo 401(k) provider that aligns with your retirement savings needs and goals.
Understanding Solo 401(k) Plans
A Solo 401(k) is a retirement savings plan for business owners with no full-time employees (except a spouse). They share many features with employer-sponsored 401(k)s, but there is one key difference. You can contribute as both the employee and the employer. This makes it easy to reach the maximum annual retirement contribution set by the IRS.
These high contribution limits ($69,000 or $76,500 for people aged 50+) help top earners reduce taxes up to $25,000 per year.
They are more flexible than other options, like SEP-IRAs or Traditional IRAs. This is especially true if you hire employees later or need to take a retirement loan. Most importantly, so long as you don’t have employees, you are exempt from many complicated IRS rules. This means you can avoid complex reporting and testing for 401(k) plans.
Here are some key features of Solo 401(k) retirement accounts:
- High contribution limits: You can make employee contributions and employer contributions. Your employee contributions can be either pre-tax or Roth (ofter referred to as Roth 401).
- Tax benefits: Contributions are typically tax-deductible, reducing your taxable income and potentially employment tax.
- Loan feature: Some Solo 401(k) plans allow you to borrow from your account, subject to certain rules.
- Flexibility: You can choose between traditional (pre-tax) and Roth contributions, depending on your tax preferences.
- Loans: Unlike IRAs, you Solo 401(k)'s allow loans up to 50% of your account value. This gives you more options to use your 401(k) to grow your business.
Understanding these features is crucial. It helps you appreciate the value a Solo 401(k) plan can bring to your retirement strategy.
In the next section, we'll discuss who is eligible for a Solo 401(k) plan.
Eligibility for Solo 401(k) Plans
To qualify for a Solo 401(k) plan, you must meet certain criteria. First, you must be self-employed or own a small business. This includes freelancers and independent contractors.
Second, you must have no full-time employees, other than a spouse. Note that you can still hire part-time employees who work less than 1,000 hours per year.
Understanding these eligibility rules is crucial. It ensures you don't violate IRS regulations.
In the next section, we'll delve into the key features to look for in Solo 401(k) providers.
Key Features to Look for in Solo 401(k) Providers
When choosing a Solo 401(k) provider, several factors come into play. These factors can significantly impact your retirement savings and taxes. They also influence how you use your retirement account to grow your business.
Key Features to look for:
Solo 401(k) Loans
Income for freelancers, solo-entrepreneurs and small business owners can vary widely. There may also be times when you need to invest more in your business.
This is why the ability to take a 401(k) loan is essential. They let you borrow from yourself to help manage income during slow business times. They also provide extra capital to help your business grow.
Automatically fund Solo 401(k) Contributions
Managing income that changes a lot each month is a common challenge for many freelancers, especially beginners. For this reason, many solo entrepreneurs want to save a percentage of their pay each month instead of a fixed amount. This way when you make less, your contribution automatically decreases. Unfortunately, most providers require you to fund your contributions via manual transfers from your bank account.
Integration with payroll, benefits and accounting systems
More solo entrepreneurs are using new payroll and benefit systems like Opolis. Their payroll solutions help business owners convert 1099 income to W-2 income. This makes it easier to qualify for traditional loans. They also provide access to health insurance that rivals the ACA marketplaces.
Others are using new accounting platforms like Bench for financial reporting and taxes. These tools help maximize business write-offs. Make sure your 401(k) contributions automatically flow into your accounting system. This is important even if you use older software like QuickBooks.
Solo 401(k) Fees
One of the most important factors is the fee structure. Some providers charge a flat annual fee, while others may charge based on the assets in your account. It's crucial to understand these fees upfront to avoid any surprises down the line.
Investment Choice
Investment options are another key consideration. Some providers offer a wide range of investment choices, including mutual funds, stocks and ETFs. Some Solo 401(k)'s even allow alternative investments like real estate, cryptocurrency, private-equity, venture capital and more.
Customer Service
Customer service is also vital. You want a provider that offers robust support, whether it's through phone, email, or live chat. Will they help you maximize your employer contribution to minimize taxes?
Compliance
The last thing you want to do as a business owner is deal with IRS and Department of labor regulations. Your Solo 401(k) provider should determine whether you need to file a form 5500, generate your plan documents, and more. Most importantly, can the provider help you transition to a Safe Harbor 401(k) if you hire employees?
Top Solo 401(k) Providers for 2024
In this section, we'll review our top Solo401k providers for 2024. We selected these providers based on their reputation, customer service, investment options, and overall value.
Provider 1: Fidelity Investments
Fidelity Investments is a well-known name in the financial industry. Fidelity offers a Solo 401(k) plan with no account fees and access to a broad range of investments. However, you may face high trading fees and commissions, depending on how you invest.
Key features of Fidelity's Solo 401(k) include:
- No setup or annual fees
- $0 Commission for most Stock and ETF trades
- A wide range of investment options
- Robust customer service
- Easy online account management
Key limitations of Fidelity's Solo 401(k):
- Loans are not allowed
- You may pay commissions or trading fees for mutual funds
- You have to manually fund your contributions (via EFT, wire or check)
- You cannot setup contributions that automatically adjust when your income changes.
Fidelity's reputation and track record make it a solid choice for your Solo 401(k) plan.
Provider 2: Charles Schwab
Charles Schwab is another top provider for Solo 401(k) plans. They offer a plan with competitive fees and a wide selection of investment options.
Key features of Charles Schwab's Solo 401(k) include:
- Low-cost index funds and ETFs
- $0 commissions to trade most stocks or ETFs
- $0 commissions for Schwam Mutual Fund OneSource
- No account setup or maintenance fees
- Access to Schwab's robust trading platform
- Excellent customer service
Key Limitiations:
- Schwab does not allow loans
- Mutual fund trades cost up to $74.95 per purchase
- No automatic funding - you must use direct deposit for your employee contributions. You must fund employer contributions via check, wire, or journal.
Charles Schwab's Solo 401(k) plan is a good choice for those who plan to fund their account a few times per year and who don't want a 401(k) loan option. However, if you deviate from the Schwab OneSource mutual funds you may expect to pay high trading fees.
Provider 3: E*TRADE
E*TRADE is a popular online brokerage that also offers a competitive Solo 401(k) plan. Their plan is known for its flexibility and wide range of investment options.
Key features of E*TRADE's Solo 401(k) include:
- No account minimums or setup fees
- Loans are allowed
- A wide range of investment options, including stocks, bonds, and ETFs
- Access to E*TRADE's advanced trading tools
- Excellent customer service
E*TRADE's Solo 401(k) plan is a good choice for those who want flexibility and a wide range of investment options.
Provider 4: Vanguard
Vanguard is a leader in the investment industry, known for its low-cost index funds. Their Solo 401(k) plan is a great option for those looking for a low-cost, straightforward retirement savings solution. However, the low-cost platform has limitations (you can see their basic plan document here)
Key features of Vanguard's Solo 401(k) include:
- Low-cost Vanguard index funds
- No account setup fees
- Access to Vanguard's robust trading platform
- Excellent customer service
Vanguard Solok Limitations:
- No 401(k) Loans
- Investors can choose from fewer than 40 Vanguard mutual funds, excluding ETFs.
- Savings don't automatically adjust with fluctuating income
- Not integrated with next-gen accounting and freelancer benefit platforms
- Pricing can be quite expensive, especially if you plan to construct your own diversified portfolio. Vanguard charges $20 per Vanguard fund you use in addition to a $20 annual custody fee. If your portfolio holds 10 funds during the year, that results in $220 or nearly 1% assuming an account balance of $20k.
Vanguard's Solo 401(k) plan is a great option for those seeking a low-cost and high-quality way to save for retirement. Their unique pricing structure charges by fund. This can be expensive for beginners. However, it can be cost-effective for those with larger balances.
However, the features may be subject to change. On April 16, 2024, Vanguard announced that Ascensus will acquire their Individual 401(k), Sep, and SIMPLE IRA businesses.
ForUsAll Solo401(k)
ForUsAll designed it's Solo 401(k) with solo-entrepreneurs and freelancers in mind. What sets them apart is that you can set up automatic contributions and take loans. Since they work with payroll and benefit systems, you can automatically fund loans. Your contributions can also adjust with your income.
Key features of ForUsAll's Solo 401(k) include:
- No account setup fees,
- Access to Schwab's self-directed brokerage
- Ability to invest directly in cryptocurrency via their partnership with Coinbase
- Loans are allowed
- Easy account setup and management
- Excellent customer service
ForUsAll is a great choice for anyone wanting a fully automated Solo 401(k). It gives access to both traditional and cryptocurrency assets.
Comparing Solo 401(k) Plans: Traditional vs. Roth
When choosing a Solo 401(k) plan, you need to decide between traditional or Roth contributions. Both have their unique advantages and considerations.
Pre-tax Contributions:
You can deduct your contributions from your taxable income now. However, you will pay taxes on withdrawals during retirement. This can be a good option if you expect to be in a lower tax bracket in retirement.
Roth Contributions:
On the other hand, a Roth allows for after-tax contributions. You won't get a tax deduction now.
However, your withdrawals in retirement will be tax-free. This is true if you meet the 5-year IRS holding requirement. This can be beneficial if you expect to be in a higher tax bracket in retirement.
Additional Considerations When Choosing a Provider
Beyond the basic features and fees, there are other factors to consider when choosing a Solo 401(k) provider. One of these is the provider's reputation and track record. You want a provider that has a history of strong performance and positive customer reviews.
Another consideration is the provider's customer service. You want a provider that offers robust support, whether it's through phone, email, or live chat. The availability of educational resources can also be a plus.
Lastly, consider the provider's digital security measures. Your retirement savings are important, and you want to ensure they're protected. Look for providers that use encryption and other security measures to keep your information safe.
Conclusion: Selecting the Right Solo 401(k) Provider for You
Choosing the right Solo 401(k) provider is a crucial step in securing your financial future. It's not a decision to be taken lightly. You should think about all the factors we talked about. This includes fees, investment options, customer service, and security measures.
Remember, the best provider for you is one that aligns with your financial goals and retirement plans. It's the one that offers the features you need at a cost you can afford.
In the end, the choice is yours. Make it wisely, and you'll be well on your way to a secure and comfortable retirement.
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