The self-directed solo 401k plan isn’t a new type of plan. It is simply a traditional 401k plan that covers just the business owner (along with his or her spouse). The business can even have employees as long as they do not work more that 1,000 hours a year.
The plans have the same rules as other 401k plans, but because they have no non-owner employees they are not subject to the same discrimination testing. The pros and cons of self directed solo 401k plans need to be clearly understood.
But the self-directed 401k has a slight variation. It allows the business owner to be the trustee for the plan. This is the feature that allows for the self direction of plan assets. This gives the business owner a very flexible structure. So let’s take a closer look at the pros and cons of self-directed solo 401k plans.
What are the Pros?
- The solo 401k business owner can serve as trustee of the solo 401k. This allows the business owner checkbook control.
- The plan can invest in traditional investments like stocks and mutual funds. But it can also invest in alternative assets like real estate, private equity, gold, private loans, and much more.
- In order to have checkbook control, an LLC does not need to be established (unlike a self-directed IRA);
- The solo 401k allows for high contribution amounts up to $54,000 (or $60,000 if over the age 50);
- Amounts from other retirement accounts (old 401k, IRA, SEP, or SIMPLE) can be rolled over to a self-directed solo 401k;
- Roth 401k contributions are allowable regardless of income level, thereby affording taxpayers, who would not otherwise be eligible, to take advantage of the Roth component. For 2017, a participant can allocate $18,000 as Roth contributions ($24,000 if over the age of 50);
- The solo 401k allows you to take a loan or borrow from your retirement funds. Loans can be made from the solo 401k at 50% of the account balance, but cannot exceed $50,000.
- A Roth 401k may be transferred to a Roth IRA. For planning purposes, it may be advantageous to transfer a Roth solo 401k to a Roth IRA before turning age 70 ½ so that you can avoid the Roth RMD requirement;
- Amounts are protected from creditors and generally not subject to bankruptcy laws;
What are the Cons?
- Like IRAs, solo 401ks are subject to prohibited transaction rules;
- When distributions commence from the solo 401k a mandatory 20% of federal taxes must be withheld from each distribution and submitted electronically to the IRS by the 15th of the month following the date of each distribution;
- Roth solo 401k funds are subject to Required Minimum Distributions (RMDs);
- At termination, the solo 401k is required to file a final Form 5500-EZ and 1099-R;
- Form 5500 is also required to be filed if assets exceed $250,000;
- You are not allowed to invest in your own business startup;
- In order to contribute to a solo 401k, self-employment, whether on a part-time or full-time basis, is required;
Retirement planning takes careful consideration. Understanding the pros and cons of self-directed 401ks can be complex. But if you educate yourself on the laws, you can find a retirement plan that will work for you and your business.