A solo 401(k) is a type of retirement plan exclusively for those who have their own businesses but don’t have any employees. You can qualify for a 401(k) if you have an incorporated business but don’t employ anyone other than yourself, if you have a sole proprietorship, or if you work as an independent contractor. As long as you work for yourself and have no employees, then you can qualify for a solo 401(k) account, which has many benefits over an IRA in the form of higher contribution limits and more flexibility in the types of investments you can have in the account.

Establishing a solo 401(k) account is part of financial planning, so you should speak to your financial planner if you’re thinking about setting one up.

How Does a Solo 401(k) Plan Work?

If you’re a business owner, then you can open 401(k) plans that benefit your employees. With a solo 401(k) account, however, because you can’t have any employees in order to qualify, this type of retirement plan can have only you and your spouse, if you have one, as its beneficiaries.

What Are the Advantages of a Solo 401(k) Account?

If you’re self-employed, a solo 401(k) account is probably the best retirement account option for you. This is because you can contribute much more to the account than you would be able to if you had an IRA. You won’t have employer matching, but that would require working for someone else rather than for yourself. 

What Are the Contribution Limits of a Solo 401(k) Plan?

401(k) retirement plans are employer-sponsored. This means that you play the role of either the employer or the employee. With a solo 401(k), you play the role of both employee and employee. Therefore, your contribution limit is the combination of the contribution limit for an employee and the contribution limit of an employer for a total of $20,500 in 2022 or $22,500 in 2023 for the employee side. For the employer side, you could contribute up to 25% of your income, which results in a total contribution limit of $61,000 in 2022 and $66,000 in 2023. If you’re over the age of 50, you can also contribute an additional $6,500 to the account in catch-up contributions in 2022 or $7,500 in 2023. With catch-up contributions, the limit rises to $67,500 in 2022 and $73,500 in 2022.

How Do You Set up a Solo 401(k) Account?

There are two ways to set up a solo 401(k) account. The first is to manage it yourself. In this case, you would open an account with a financial institution like a broker-dealer or a brokerage firm. That financial institution would be the custodian of your solo 401(k) account and would therefore manage the process of investing the assets that you contributed into the account. The person managing your investments would function as your financial advisor. If you already have a financial advisor that you want to continue working with, you can have them open the account on your behalf, and then they would manage your investments for you.

Can You Manage Your Own Solo 401(k) Account?

It’s possible that you might be able to manage your own investments instead of having a financial advisor or the account custodian do it for you. To do this, you would need to find a financial institution that could store the funds but that would be willing to have the account be self-directed. Typically, you would look for a self-directed solo 401(k) plan provider. If you decide to go this route, you would need to carefully read the terms and conditions to determine exactly what is your responsibility and what would be the responsibility of the plan provider.

Is Self-Directed Better than Managed?

Typically, it’s recommended that you don’t go the self-directed route. This is because a professional has a better knowledge of which investments will be the best for your account’s growth. Your expertise is your business while theirs is in managing investments. Letting a financial advisor manage your investments would put your account in the hands of an expert. Plus, you would have more free time to work on growing your own business instead of having to check your investments.

A financial advisor can also help to ensure that your solo 401(k) stays balanced by rebalancing when necessary to keep your investments at a balance that you’re comfortable with.