Pros & Cons Of Using A Solo 401k You Must Know Of!

There are a lot of benefits to being self-employed. You are your own boss, you do all the work, and you reap all the rewards. However, one of the major downfalls is that there’s nobody to give out retirement plans. That’s where a Solo 401k comes in clutch.

Here are the pros and cons of using a Solo 401k:

Pros Cons High contribution limits No full-time employees Tax benefits More work to set up and manage Borrowing without penalty More fees Can have other 401k plans Must be substantial and reoccurring Broad investment opportunities  

Solo 401k plans are there for sole proprietors to be able to have a retirement plan in place. They can get painfully tricky to manage and handle, so keep reading for in-depth looks at the pros and cons for these plans in order to make an educated decision about them.

Pros of Using a Solo 401k

If eligible for a Solo 401k retirement plan, it might be worth looking into. There are numerous pros to using one beyond just being able to have a retirement plan at all, which might not be possible for someone working for themselves!

High Contribution Limits

The contribution limits for a Solo 401k plan are extremely high compared to other types of 401k plans. On average, these are double what is allowed and is based on the net business income to calculate these limits. 

Additionally, these limits increase after the plan owner is 50 years old. It can be all the way up to 100% of the net income as well, so it’s totally viable to have a side personal business just for making money to put into the plan.

Tax Benefits

If taxes are managed effectively and appropriately, there are tax benefits based on which type of Solo 401k is used.

Traditional

Invested money in a traditional Solo 401k is tax-deferred until retirement, where taxes are only paid when these funds are distributed. Therefore, any money put into the fund will be deferred until then, thus lowering taxable income.

Roth

There are no income limits when using a Roth Solo 401k plan unlike a regular Roth IRA plan. A traditional plan can almost always be converted to a Roth if necessary, and the plan is funded with money that has already been taxed. Therefore, money grows without ever needing to pay tax on it again.

Borrowing without Penalty

While not always a good idea to borrow from a retirement plan early, a Solo 401k has the benefit of not having penalties for doing so under certain circumstances. If borrowing under $50,000 or 50% of the funds (whichever is lower) then there are no penalties for doing so. Just try to put that back as soon as possible.

Can Have Other 401k Plans

Self-employment can be a nice side hustle, but can also be the primary form of income. That doesn’t mean that it’s mutually exclusive to a salaried job working for someone else. Thankfully, a Solo 401k plan can be contributed to even if you have other 401k plans from other sources.

Broad Investment Opportunities

One of the most appealing parts of a Solo 401k plan is that they have a wider range of accepted investment opportunities. However, these opportunities might be limited differently based on providers.

SEPira(k), for example, offers:

• Mutual Funds

• Stocks

• Bonds

• Real Estate (both residential and commercial)

• Tax Liens

• Private Placements

• Precious Metals

• Energy Investments

• Equipment Leasing

• Foreign Currency

This is not necessarily an exhaustive list either. With their expert guidance and state-of-the-art secure platform, they can help find the best opportunities for all unique and individual needs.

Cons of Using a Solo 401k

Nothing is perfect. So, while there are numerous pros to a Solo 401k, there are also some cons that are worth taking note of. Some are manageable with quality assistance and guidance, but others might be dealbreakers. Feel free to shop around for providers to help make the process as worthwhile and easy as possible.

No Full-Time Employees

With a Solo 401k plan, no full-time employees are allowed. The exception is the spouse of the plan owner, who can also make contributions to the plan. 

There are also other people who are excluded from this, such as: 

• Employees that work under 1,000 hours per year

• 1099 contractors

• Employees under 21

• Other business owners/partners who are not the spouse.

Additionally, anyone working at least 500 hours in 3 consecutive years will have an impact on the plan overall but will not count as full-time employees.

More Work to Set Up and Manage

Because a Solo 401k plan is self-directed, it is far more work to set up and manage. If it is done incorrectly, the IRS will deem all assets as taxable income. The current best practice from providers is using multiple Excel spreadsheets, which most will make their clients manage themselves. Finding a provider such as SEPira(k) who help do the recordkeeping and have a state-of-the-art secure platform can help make this easier.

More Fees

Fees are a nightmare for anything, especially those that are financial. Solo 401k plans tend to be riddled with fees from every side, starting with setup fees and moving into administrative and maintenance. Chances are, they’re going to start with more fees in the first year and change as time goes on too.

Must be Substantial and Reoccurring

The IRS is rather picky with how much and how often contributions to a Solo 401k are done. They need to be relatively regular and also significant enough to show that there is an intention to continue with the plan. Otherwise, they will have it be discontinued. It’s going to be based on income, so be sure to keep track of all of that.

Conclusion

It can be tricky to set up and manage a Solo 401k. One wrong step and the IRS is disqualifying and handing out a massive tax bill. Therefore, it’s extremely important to make sure that any provider chosen for the plan helps to ensure that all pros of the plan outweigh the cons. The experts at SEPira(k) do just that in order to make recordkeeping and investing as easy as possible. This is all while still giving a wide range of options to choose from so that it can still be self-directed and personalized to suit all unique needs.