A Solo 401(k) is a type of retirement plan for self-employed individuals or small business owners with no employees, other than their spouse.
It is also known as an individual 401(k), self-employed 401(k), or one-participant 401(k).
These plans allow self-employed individuals to contribute to their retirement savings while enjoying the same tax benefits as traditional 401(k) plans.
The Solo 401(k) is similar to a traditional 401(k) plan in that it allows participants to contribute a portion of their income to the plan, and the contributions are tax-deductible. The contributions made to the plan grow tax-free until retirement, and withdrawals in retirement are taxed as ordinary income.
Who is eligible for a Solo 401(k)?
To be eligible for a Solo 401(k), you must be self-employed with no employees, other than your spouse. This includes sole proprietors, independent contractors, and small business owners with no full-time employees.
If you have part-time employees, they may be excluded from the plan as long as they work less than 1,000 hours per year. If you have multiple businesses, you can set up a Solo 401(k) for each business as long as they are all under the same tax identification number.
How does a Solo 401(k) work?
A Solo 401(k) works like a traditional 401(k) plan, but with some important differences.
Here are the key features of a Solo 401(k):
- Contribution limits: In 2023, you can contribute up to $19,500 to your Solo 401(k) as an employee. If you are 50 or older, you can make an additional catch-up contribution of $6,500, bringing the total to $26,000. In addition, as the employer, you can make a profit-sharing contribution of up to 25% of your net self-employment income (up to a maximum of $61,000 in 2023), bringing the total contribution limit to $88,500.
- Tax benefits: Contributions to a Solo 401(k) are tax-deductible, which means you can reduce your taxable income by the amount you contribute. The contributions grow tax-free until retirement, and withdrawals in retirement are taxed as ordinary income.
- Investment options: The Solo 401(k) allows you to invest in various assets, including stocks, bonds, mutual funds, and real estate.
- Administration: The Solo 401(k) is easy to administer, as there are no annual filing requirements unless your plan assets exceed $250,000.
What Can You Invest in with a Solo 401(k):
When choosing a financial institution to serve as the trustee for your Solo 401(k) plan, it is crucial to comprehend the investment options they permit for directing your contribution funds. Your trustee’s restrictions will play a significant role in determining the types of gold accessible to you.
In theory, Solo 401(k) plans are eligible to invest in:
- Individual Stocks
- Individual Bonds (Corporate and Government)
- Certificates of Deposit (CDs)
- Mutual Funds
- Exchange-Traded Funds (ETFs)
- Life Insurance
- Real Estate
- S Corporations
- Precious Metals
Investing in gold bullion is possible through a Solo 401(k) plan, as well as various other alternative assets. Nonetheless, a lot of trustees may not have the resources or willingness to execute investment metal transactions. In case you possess a Solo 401(k) and lack a trustee who can carry out a precious metals purchase, it would be optimal to either rollover into a self-directed IRA or establish a new one.
Benefits of a Solo 401(k):
- Higher contribution limits: The contribution limits for a Solo 401(k) are higher than those for a traditional IRA or a SEP-IRA, allowing individuals to save more for retirement.
- Tax advantages: Contributions to a Solo 401(k) are tax-deductible, reducing the individual’s taxable income. The earnings on the plan are tax-deferred, meaning that they are not taxed until the individual withdraws them in retirement.
- Flexible investment options: The individual can choose from various investment options, including stocks, bonds, mutual funds, and real estate.
- Easy to set up and administer: These plans are easy to set up and administer, with minimal paperwork and low fees.
- Ability to borrow from the plan: The individual can borrow up to $50,000 or 50% of the plan balance, whichever is less, from their Solo 401(k) plan without incurring any taxes or penalties.
Considerations for a Solo 401(k):
- Limited to self-employed individuals: A Solo 401(k) is only available to self-employed individuals or small business owners with no employees other than themselves, their spouses, or business partners.
- Potential for high fees: While these plans generally have lower fees than traditional 401(k) plans, they can still be more expensive than other retirement savings options, such as a SEP-IRA or a SIMPLE IRA.
- Complex rules: The rules governing Solo 401(k) plans can be complex, and individuals should seek professional advice before setting up a plan.
Can You Invest in Gold with a Solo 401(k)?
Yes, it’s possible to invest in gold with a 401(k).
However, if you’re interested in availing the proper benefits of investing in precious metals, you should get a gold IRA.
If you already have a 401(k), you can rollover its funds to a gold IRA. A self-directed gold IRA can help you buy and hold gold, silver and other precious metals.
Furthermore, it will help you preserve your wealth as gold has historically retained its value during economic downturns. The banking crisis has caused many investors to question the reliability of traditional IRAs as well.
There are plenty of experts who can help you convert your 401(k) into a gold IRA. (Learn more here)
A Solo 401(k) is a powerful retirement savings tool for self-employed individuals and small business owners. It offers higher contribution limits and tax advantages compared to other retirement savings options.
However, many modern investors have started preferring gold IRAs over 401(k)s.
Whether you want to preserve your wealth from inflation or have better liquidity, precious metals IRAs enjoy a better reputation. For investors who want to save their retirement savings from economic downturn, opening a gold IRA might be a more suitable tactic.
You can check out our hand-picked top gold IRA providers to learn more.