How to Invest in a Solo 401(k) for Your Small Business

As a small business owner, you’re constantly juggling a million things. Retirement planning might not seem like the top priority, but it should be. Traditional 401(k)s aren’t an option for the self-employed, but the Solo 401(k) offers a powerful solution to build a robust retirement plan for yourself and your business. This guide will walk you through everything you need to know.

What is a Solo 401(k)?

A Solo 401(k) is a retirement savings plan designed for self-employed individuals and small business owners. Unlike traditional 401(k)s, you act as both the employee and the employer, allowing you to contribute to the plan and take advantage of significantly higher contribution limits.

Is a Solo 401(k) Right for You?

Self-Employed Status: You must be self-employed or operate as a sole proprietor, partnership, or LLC.
No Employees: You cannot have employees contributing to the plan (although you can add them later if your business grows).
Tax Advantages: The biggest benefit is the potential for tax-deferred growth, meaning you don’t pay taxes on your investment gains until retirement.

Contribution Limits (2020)

As of December 2nd, 2020, here’s the breakdown of contribution limits:

Employee Contribution: Up to $69,000 (or 100% of net self-employment income, whichever is less).
Employer Contribution: You can contribute an additional amount as the employer, up to $30,000.
Total Contribution Limit: The combined employee and employer contributions cannot exceed $70,000 in 2020.

Investment Options

Solo 401(k)s offer a wide range of investment options, similar to traditional 401(k)s. These typically include:

Mutual Funds: Offer diversification and access to professional management.
Index Funds: Track a specific market index (like the S&P 500) and are typically low-cost.
Target-Date Funds: Automatically adjust their asset allocation as you approach retirement.
Brokerage Accounts: You can also invest in individual stocks and bonds through a separate brokerage account.

Setting Up Your Solo 401(k)

Choose a Provider: Several companies offer Solo 401(k) administration services. Research and compare fees, investment options, and features. Popular choices include Fidelity, Vanguard, and Schwab.
Open the Account: Once you’ve chosen a provider, you’ll complete the necessary paperwork to open the account.
Make Contributions: Decide how much you want to contribute each month and automate the process if possible.
Rebalance Your Portfolio: Periodically review your portfolio and rebalance as needed to maintain your desired asset allocation.

Important Considerations

Fees: Pay attention to administrative fees, investment management fees, and transaction fees. Lower fees mean more money in your retirement account.
Tax Implications: Understand the tax implications of contributing to a Solo 401(k). Consult a tax professional for personalized advice.
Early Withdrawal Penalties: Be aware of the penalties for early withdrawals.
Roth vs. Traditional: You can choose to fund your Solo 401(k) with either a Roth or traditional approach. Research the differences to determine which best suits your situation.

Disclaimer: This blog post provides general information only and does not constitute financial advice. Consult with a qualified financial advisor or tax professional before making any investment decisions.