The Solo 401(k) Global Investing Guide for Small Business Owners
Contents
- What is a solo 401(k)?
- Who can set up a solo 401(k)?
- Assets You Can Hold in a Solo 401(k): Domestic and International Options
- Traditional Investments
- Alternative Investments
- What Assets You Can't Hold in a Solo 401(k)
- How a solo 401(k) fits into a wealth protection plan
- Use Cases
- How to open a solo 401(k)
- Solo 401(k) contribution limits 2024
- Pre-tax vs. Roth Solo 401(k) contributions
- Is there such a thing as a "Checkbook Solo 401(k)"?
- How Solo 401(k) withdrawals work
- RMDs for Solo 401(k)s
- Comparing solo 401(k) with other retirement plans
- Frequently Asked Questions
- Need Help?
A solo 401(k) is a retirement plan for business owners with no employees beyond themselves and their spouse.
It’s very flexible and can hold a wide variety of asset classes.
You can hold not just domestic assets, but offshore assets too. That can make it quite useful for international wealth protection.
We work with a lot of independent business owners and entrepreneurs across the spectrum. Many of their plans are very different from each other. But when it comes to “foundational” tax planning, a solo 401(k) retirement account often plays a part.
If you have a small business without employees, a solo 401(k) can be a great, low-cost, easy way to defer a lot of tax for years and even decades.
In this article, I’ll give you a full rundown on how these things work, examples from actual client files on the type of people using these, and how to get started if it makes sense for you.
What is a solo 401(k)?
A solo 401(k) is type of retirement account specifically for self-employed business owners who don’t have employees. Like a traditional 401(k) plan, a solo 401(k) allows you to build savings tax deferred.
But unlike a traditional 401(k), you can also invest in all sorts of asset classes that aren’t available under most traditional plans. Not only that, but you can contribute a lot more per year — up to $69,000 in 2024 if you’re under 50. (Up to 76,500 if you’re over 50.)
Roth solo 401(k) plans also exist, but traditional solo 401(k) plans are more common.
Who can set up a solo 401(k)?
Typically, like any tax-deferral program, there are rules around how and when you can use them.
The good news is that, unlike other retirement accounts, you can set one up regardless of your age or income. You can technically also have a regular job, although for the majority of our clients, their business and investments are their main source of income.
However, you need to have a business of some type. You can be self-employed or form a company (whether an LLC or corporation). You can’t have any employees other than you (and your spouse if applicable). And you have to produce enough income to fund the plan.
Assets You Can Hold in a Solo 401(k): Domestic and International Options
With certain restrictions, you can hold almost any asset class within your solo 401(k) — much more than a traditional employer-sponsored 401(k). Here’s a comprehensive breakdown:
Traditional Investments
Stocks: Individual shares of publicly traded companies. Both domestic and international.
Bonds: Government, corporate, and municipal bonds. This includes bonds issued by foreign governments, corporations, or other entities outside the United States.
Mutual Funds: Pooled investments managed by professional fund managers. Interestingly, you can also invest in foreign mutual funds and not be subject to the complicated Passive Foreign Investment Company (PFIC) rules that usually make foreign funds a no go for US taxpayers.
Exchange-Traded Funds (ETFs): Funds that track indices or sectors and trade like stocks. Domestic and offshore are both possible.
Certificates of Deposit (CDs): Bank-issued, time-deposit investments with fixed interest rates. For both domestic CDs and international bank equivalents.
Money Market Funds: Low-risk funds that invest in short-term debt instruments. Although the domestic (US) money markets (currently) offer some of the best risk adjusted returns, you have the flexibility to invest in overseas funds to get specific currency exposure. More popular among our clients are Swiss Francs, Singaporean Dollar, and even the Euro.
Alternative Investments
Precious Metals: Certain forms of physical gold, silver, platinum, or palladium. However, the metals must be held by a depository either within the US or overseas.
Real Estate: You can directly own physical real estate properties within the US or internationally. You can also invest in Real Estate Investment Trusts (REITs) almost anywhere in the world.
Private Equity: Investments in privately held companies, including startups both offshore and domestically.
Private Loans/Notes: You’re able to issue loans or notes through your solo 401(k). But there are quite a few rules, regulations and best practices to keep in mind.
Tax Liens: You can also purchase tax lien certificates issued by local governments. This opportunity is much more common in the US than other countries, but there’s nothing in the IRS regulations that prevents you from investing in tax liens available in other countries.
Hedge Funds: Solo 401(k)s can be used to invest in both domestic and international hedge funds.
Foreign Currencies (Forex): You can directly trade foreign currencies within this requirement account. However, a big warning: Although you can use leverage that’s common with such investments, there are some important reasons not to. We would need to have a look to see if this would make sense in your situation.
Cryptocurrencies: You can hold digital assets like Bitcoin, Ethereum, and others. You just need to follow certain rules to do it properly.
Options and Futures: You can also trade derivatives like options and futures — both domestically and internationally.
Limited Partnerships (LPs): You’re able to use your Solo 401(k) to invest in structured partnerships, regardless of where they are located.
Private Placements: You can invest in both overseas and domestic private placement opportunities provided you meet the definition of an accredited investor.
Crowdfunding Ventures: Believe it or not, you can even invest in projects or businesses through online crowdfunding platforms. However, there are certain rules and regulations you need to follow to keep everything compliant.
What Assets You Can't Hold in a Solo 401(k)
There are also certain assets you can’t hold in these accounts. That includes:
Collectibles: Things like art, antiques, gems, wine, and guns.
Commodities: You can’t directly hold most commodities like oil, crops, and the like. There are exceptions for precious metals, but only in certain forms.
Life Insurance: All forms.
Personal-Use Real Estate: Certain real estate that you or your family personally use.
If you do buy any of these through your Solo 401(k), the funds you invest will be deemed to have been distributed from your plan and you’ll need to pay tax on its full value.
There may be an exception if you have a Roth Solo 401(k). In that case, if you make a prohibited investment, you might not owe any tax, if you meet other requirements. But the amount deemed distributed will no longer grow tax-free.
Watch out for Prohibited Transactions and Disqualified Persons
One other limitation on these plans is who you do business with. Specifically, you cannot use Solo 401(k) funds to do business with yourself, your immediate family members, or any entities you control.
Doing so will create what the IRS calls a prohibited transaction. You will be forced to reverse the transaction and pay various fees and penalties.
How a solo 401(k) fits into a wealth protection plan
Solo 401(k)s do not usually benefit from the Employee Retirement Income Security Act (ERISA) protections that traditional 401(k)s do. However, they can be drafted to offer greater protection than most IRAs have. And they do still receive some protection under federal bankruptcy laws.
That said, because bankruptcy is usually considered the absolute worst-case scenario, it’s more useful to look at creditor protections against any potential claim.
And on that count, built-in asset protection for these accounts is more mixed.
The first line of defense is to look at what protections you have at state law. Some states, like Florida, have very strong asset protection for retirement accounts. Others, like California, are notoriously flexible in saying whether creditors can take your assets (retirement or otherwise) if “you don’t need them.”
That all said, a solo 401(k) is better used as just one piece of a proper well-rounded plan. It’s not really built to stand on its own as an asset protection tool.
Use Cases
As you’ve probably gathered, a solo 401(k) is a remarkably flexible retirement account. Here are just a few client examples pulled from our files:
Example #1:
Real Estate Investor
A real estate investor owned a large portfolio of land and apartment units. That generated a fair bit of cashflow each year. They did have a few independent contractors that helped out with certain tasks, but the investor and his wife were the only true employees.
They worked with us to set up a solo 401(k) to defer some of that tax over time.
Example #2:
Employee at Fortune 500 Company
A highly paid executive at a Fortune 500 company decided to start a business on the side. He wanted his family to be involved and benefit from the business. But he also liked the idea of being able to put more away for retirement set to begin in about five years.
We were able to build a plan that kept him and his wife as the sole employees but that still let the kids profit from the business as it succeeded.
Example #3:
Freelance Consultant
Over the years, we’ve had many clients that were experts in their field and set up a company simply to manage those contracts. One client in particular was a highly skilled programmer who was hired by different firms to coordinate other teams on a per project basis.
Until we started working together, he was still doing his freelancing as a sole proprietorship. While he could have created a solo 401(k) with a sole proprietorship, we suggested he use a new LLC to operate his business to provide greater asset protection. And he could start putting money away into a Solo 401(k).
How to open a solo 401(k)
Opening a solo 401(k) is relatively simple and can be done through a number of service providers. At the Nestmann Group, we also offer a “done for you” service if you want the benefits of a solo 401(k) without the hassle of setting up and maintaining it on your own.
(If you’re interested in learning more, feel free to reach out to us.)
Getting started is easy. You’ll need an Employer Identification Number (EIN), an application form, and a plan adoption agreement. Once approved, you can open a bank account for the solo 401(k) and begin making contributions and choose your investments.
Solo 401(k) contribution limits 2024
You can add to your solo 401(k) plan as both an employee and an employer, which adds up to a lot more than a traditional or Roth 401(k). In 2024, the maximum is $69,000.
- As an employee, you can contribute up to $23,000, or 100% of your compensation, whichever is less.
- As an employer, you can contribute up to 25% of your employee’s (i.e. you) compensation.
In practical terms, that means that, if you want to make the most of this, you will need to pay yourself as least $184,000. By doing so…
- As an employee, you’ll be able to contribute $23,000.
- As an employer, you’ll be able to contribute 25% of the $184,000, or $46,000.
- $23,000 + $46,000 = $69,000.
If you’re over 50, you can contribute an extra $7,500 on the employee side, bringing your employee contribution limit to $30,500. That increases the total contribution limit to $76,500.
The IRS generally increases the contribution limits every year based on inflation and cost-of-living adjustments. As mentioned, for 2024, the maximum for a Solo 401(k) is $69,000 for someone under 50.
In 2024, you can contribute up to $23,000 or 100% of your income as an employee, whichever is less. If you are 50 or older, you can make an additional catch-up contribution of $7,500 per year.
Pre-tax vs. Roth Solo 401(k) contributions
The main tax benefit of a solo 401(k) is deferral. You lower your taxable income in the year you make the contribution. That pre-tax contribution then grows for years inside the plan. At some point, it’s pulled out and you pay regular income tax on that withdrawal.
This strategy is a good deal because:
- The initial contribution can grow and compound without any tax drag over many years.
- By the time you pull it out, you expect to be in a lower tax bracket than you are when you make the contribution.
A Roth solo 401(k) is funded with after-tax dollars, meaning you don’t get the deduction in the year you make the contribution. However, you do get the advantage of tax-free growth within the plan AND you don’t pay any taxes on withdrawal.
Is there such a thing as a "Checkbook Solo 401(k)"?
Yes, there is. That’s where you set up a solo 401(k) that owns an LLC or other corporate structure. You then make your investments through that corporate structure instead of directly through the Solo 401(k).
In that sense, it’s very similar to a Checkbook IRA you can read about online, with one big difference.
From an administrative point of view, unlike other retirement options, you don’t need a custodian (you, as the businessowner, are the administrator by default). So, unlike a checkbook IRA, there’s no need for an extra company to give you this “checkbook” control.
Not only that, but we’ve found that some service providers (investment funds, asset managers, precious metals repositories, etc.) don’t know what to do with such a structure, which means they won’t take your business.
That said, there can be some asset protection value.
Needless to say, this is something that is very much case-by-case. If it appeals to you, please get in touch to discuss further.
How Solo 401(k) withdrawals work
Once you are 59½ years old, there are no penalties for withdrawing money from your solo 401(k) or Roth solo 401(k). Prior to that, with a few exceptions, you’ll have to pay a 10% penalty on any money taken out.
With a Roth solo 401(k), your withdrawals are tax-free. With a traditional solo 401(k), your current tax bracket determines how much tax you’ll pay.
RMDs for Solo 401(k)s
Other than a Roth IRA and a Roth solo 401(k), all retirement accounts have something called Required Minimum Distributions, or RMDs. Regular solo 401(k)s are no exception.
They currently kick in at age 73 (rising to 75 in 2033) and can be a challenge for planning, especially from an asset protection point of view.
If RMDs are a potential issue for you, there are other options available including Private Placement Variable Annuities and Private Placement Life Insurance.
Comparing solo 401(k) with other retirement plans
Solo 401(k) vs. SEP IRA
A Simplified Employee Pension (SEP) IRA is another retirement plan option for self-employed individuals. Like a solo 401(k), this option lets you contribute up to $69,000 or 25% of your annual income, whichever is less. However, there is one big disadvantage — what you contribute to the plan has to be equal for all eligible employees, based on a percentage of their compensation.
A solo 401(k) fits most businessowners better so long as you don’t have employees.
Solo 401(k) vs. Traditional 401(k)
Solo 401(k) plans and traditional 401(k) plans have similar tax benefits and withdrawal rules. Both are usually funded with pre-tax dollars, giving you a tax break upfront and the chance to be taxed at a lower rate when you withdraw in retirement.
The key differences are:
A solo 401(k) lets you contribute more because you can contribute as both an employee and an employer.
Solo 401(k)s are usually self-administered, allowing you to choose from a wider range of investments than most traditional 401(k)s.
Traditional 401(k)s generally offer better asset protection out of the box compared to a solo 401(k).
FAQs about solo 401(k) contribution limits
What is the maximum employee contribution limit for a solo 401(k)?
In 2024, the maximum employee contribution limit for a Solo 401(k) is $23,000. If you are 50 or older, you can also make an additional catch-up contribution of $7,500, bringing the total to $30,500.
Can I contribute both employee and employer contributions to my solo 401(k)?
Yes, you can contribute both as an employee and as an employer to your Solo 401(k). As an employee, you can contribute up to $23,000 in 2024 (or $30,500 if you’re 50 or older). As the employer, you can contribute up to 25% of your compensation, with the total combined contributions (employee and employer) not exceeding $69,000 in 2024 (or $76,500 if you’re 50 or older).
What is the total contribution limit for a solo 401(k) in 2024?
The total contribution limit for a Solo 401(k) in 2024 is $69,000 if you are under 50. If you are 50 or older, you can make an additional $7,500 catch-up contribution, bringing the total to $76,500.
How do catch-up contributions work for a solo 401(k)?
If you are 50 or older, you can make an additional catch-up contribution of $7,500 on top of the standard employee contribution limit. This means your employee contribution can go up to $30,500 in 2024. This catch-up amount is added to the overall total contribution limit.
Are solo 401(k) contributions tax-deductible?
Yes, contributions to a Solo 401(k) are tax-deductible. Both the employee contributions (if made with pre-tax dollars) and the employer contributions reduce your taxable income for the year, providing a tax benefit.
Can I use a solo 401(k) even if I have employees?
We’ve had people approach us about this before, so it’s worth mentioning here.
They want to know if it’s possible to create a structure that lets them use this retirement account while still having employees.
On the surface, no. The rules are pretty clear that this program is only available to business owners and their spouses.
But theoretically, there is a workaround. You could create a new company that then pays you as an independent contractor for services you provide to the main business. You’ll see such “advice” online.
However, in practice, the IRS does not look kindly on such blatant attempts to get around the rules.
In those cases, there are other tax planning options available, including other retirement account options like a SEP IRA or a SIMPLE IRA.
Need Help?
Although there’s a lot of opportunity here, we rarely recommend clients try to do this on their own. It’s better to work with a firm that knows what they’re doing so that you experience the benefits with minimum hassle.
That’s something we’ve help our clients do since 1984. To see if our planning is right for you, please book a free, no-obligation call with one of our Associates to discuss further.
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We have 40+ years experience helping Americans move, live and invest internationally…
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