The Solo 401(k)

If you're self-employed,this episode is for you.

Elizabeth Carlassare
3-minute read
Episode #13

Today’s topic is the Solo 401(k).

If you’re self-employed and didn’t pay much attention to last week’s episode on the Roth 401(k), now is the time to listen up because this episode is for you! If you’re a sole proprietor or own a business with no employees other than your spouse, you can create your own Roth 401(k). And you don’t even have to pester your employer to do it!

The Individual 401(k)

There’s a version of it just for you. The solo 401(k) (also known as a self-employed or individual 401(k)) is available to the self-employed and business owners who have no employees other than their spouse. It has a Roth option, so you can choose to contribute after-tax money and have the earnings on your contributions grow tax free!

With the solo 401(k), you can make two types of contributions: salary deferral and profit sharing. In most cases, this combination means you can contribute more with a solo 401(k) than you could with other types of retirement plans for the self-employed.

With a solo 401(k), the limit on the salary deferral contribution is the same as the 401(k) contribution limit: for 2007, it’s $15,500.

And, you can contribute up to 20% of your self-employment income or up to 25% of your compensation if you’re incorporated, up to a maximum of $45,000. Your total combined maximum contribution to a solo 401(k) is also $45,000 (or $50,000 if you’re age 50 or older).

Here’s an example of how it works: say, you earn $100,000 in 2007 from your sole proprietorship. Your maximum solo 401(k) contribution would be $35,500 (that is, the $15,500 maximum salary deferral contribution plus 20% of the $100,000 you earned). With traditional self-employed retirement plans, your maximum contribution in this case would be $20,000 dollars instead, which is much less.

And remember the contribution limits for a solo Roth 401(k) are much higher than the $4,000 Roth IRA contribution limit. So if you’re self-employed or a business owner with no employees other than your spouse, a solo Roth 401(k) is a great way to sock away more money into a Roth and reap the benefit of tax-free growth on your earnings.

Self-Directing Your Retirement Funds

Now, Episode 7 was about a self-directed IRA. It’s very cool and really puts you in the driver’s seat. If you listened to that episode, you learned that a self-directed IRA allows you to invest in just about any type of asset (including investment real estate and privately-held businesses). It also allows you to make secured and unsecured loans with your IRA.

So can you self-direct a solo Roth 401(k)? Yes, you sure can. While you can’t do it with a traditional bank or brokerage, you can do it with a custodian that allows you to invest in any of the asset classes permitted by the IRS. With a self-directed solo 401(k), you can also invest in S corporations and life insurance--two things you can’t invest in with a self-directed IRA.

For a link to a self-directed solo 401(k) custodian, go to the bottom of this page.

As always, everyone’s situation is different so it’s a good idea to consult your tax or financial advisor.


Today, I’m giving away another copy of IRA Wealth by Patrick Rice. I really like this book because it shows you how to invest in assets such as real estate and privately-held businesses in an IRA. And the winner is Anthony C. in Austin, Texas. Congrats, Anthony! Anthony was the first person to correctly answer last week’s trivia question, which was “What is the value of the metal in a nickel?”

Anthony correctly answered that the metal in a nickel is worth 7.8 cents (based on March 6 closing prices for base metals). Because of inflation, the intrinsic value of nickels and copper pennies is higher than their face values. Don’t get too excited, though. You can’t melt down your nickels and copper pennies, and sell the metal for a nice profit. Anthony also provided a link to a U.S. Mint interim rule, issued in December, that prohibits melting nickels and pennies. Links to the rule and the Coinflation website, which tracks the metal value of coins, are also available at the end of the transcript for this episode at QuickAndDirtyTips.com.

Cha-ching! That's all for now, courtesy of Money Girl, your guide to a richer life.

Thanks again to all of you who have posted a review at iTunes! And, if you haven’t posted one, it would be great if you could take a moment to write one. Also, check out the newest QDnow podcasts: Legal Lad and The Mighty Mommy. Thanks for listening!


Self-directed IRA custodians

Self-directed IRA and solo 401(k) mortgage lender: North American Savings Bank

Traditional brokerages offering a solo 401(k) (investment types limited to those that brokerages offer):

See the intrinsic value of coins at Coinflation.
See the U.S. Mint interim rule prohibiting melting of nickels and copper pennies.

Image courtesy of Shutterstock