[vc_row type=”in_container” scene_position=”center” text_color=”dark” text_align=”left” overlay_strength=”0.3″][vc_column column_padding=”no-extra-padding” column_padding_position=”all” background_color_opacity=”1″ background_hover_color_opacity=”1″ width=”1/1″][vc_column_text]If you’ve ever held a job then it is likely that you have heard of a 401(k). In fact, if you are like most people you have held a couple of jobs and have multiple 401(k)s with no idea what to do with them.

You’ve likely heard, or even taken advantages of employers offers to match your contributions up to a certain percentage. Or maybe you are the employer and are now in charge of deciding if you can and should be doing something about a solo 401(k).

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401(k) Basics

I would like to take a paragraph or two to simply explain what a 401(k) is for those who honestly have no clue what they are picking and simply know that it has something to do with retirement. At its simplest form a 401(k) is a retirement account that is created for an employee by an employer.

There are no rules requiring the employee to put money away in this account, but it is a very good idea. This is because most companies will offer matching contributions to the account up to a certain level.

So if you put away $400 a month into your retirement account your employer may match that and also put away $400, or even $800. So in essence you are getting free money, as long as you use it for your retirement.

The second benefit of a 401(k) is the tax deferment. You can keep putting in money and not having to pay taxes on the money until you withdraw it.

Some people like this option while others hate it, because in the end you pay more taxes, but the option is there.

While hearing the words investing and retirement may scare you, there is no need to be afraid. While some people run self-managed 401(k) plans a large majority of the population just let the professionals handle their money and don’t worry about it until they come close to retiring.

There are some positives and negatives to this. Want to learn more? See what is a 401(k)?

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The Solo 401(k)

There is a good chance that you don’t understand the variety of options available to you and know that picking the wrong options could cost your business thousands of dollars. While you may not have heard of it, the solo 401(k) plan is actually nothing new.

The plan has been around for nearly 35 years. It is very similar to a normal 401(k) plan except it is for businesses that have only a single employee.

A lot of times you will hear the word self 401(k) bandied about as well. This is just another word for a solo 401(k), coming from the concept that the plan is mainly for self-employed individuals.

There are two requirements for someone to be on this type of plan. They must first be engaged in self employment and second they must have no full-time employees in this engagement.

This is what sets a solo 401(k) apart from a regular plan, the singularity of the individual on the plan.

[/vc_column_text][/vc_column][/vc_row][vc_row type=”in_container” scene_position=”center” text_color=”dark” text_align=”left” overlay_strength=”0.3″][vc_column centered_text=”true” column_padding=”no-extra-padding” column_padding_position=”all” background_color_opacity=”1″ background_hover_color_opacity=”1″ width=”1/1″ offset=”vc_hidden-sm vc_hidden-xs”][vc_column_text][the_ad_group id=”39″][/vc_column_text][/vc_column][vc_column centered_text=”true” column_padding=”no-extra-padding” column_padding_position=”all” background_color_opacity=”1″ background_hover_color_opacity=”1″ width=”1/1″ offset=”vc_hidden-lg vc_hidden-md”][vc_column_text][the_ad_group id=”38″][/vc_column_text][/vc_column][/vc_row][vc_row type=”in_container” scene_position=”center” text_color=”dark” text_align=”left” overlay_strength=”0.3″][vc_column column_padding=”no-extra-padding” column_padding_position=”all” background_color_opacity=”1″ background_hover_color_opacity=”1″ width=”1/1″][vc_column_text]Benefits
There are quite a few benefits to going this route, and some of them can make a huge impact on your retirement.

To this author, the number one impact lies in the concept of a solo 401(k). You can contribute quite a bit to your retirement (nearly $17,000 a year) but you also have the option of using your own business to match your contributions and can contribute quite a bit more to your retirement then you could with a regular 401(k) or IRA.

So as an example we will use our employee, Spencer. Spencer is very excited about retirement and makes about $100,000 a year.

He is self-employed and is eligible for a solo 401(k) plan. So Spencer learns how to get it set up and sets up his account. He contributes the maximum amount each year which is about $18,000.

However Spencer also gets to control how much his business will contribute, and his business is going to contribute another $35,000 making his total contribution $53,000, which is much higher than he could ever to contributing to a Roth IRA, yet he can still get many of the same benefits as a Roth IRA.

The IRS says Spencer has the ability to contribute $53,000 annually to his solo 401(k), which is nearly 4 times as much as can be contributed with an IRA, which is what many people use for their retirement. If you are married, it gets even better with your limit going up to an insane $100,000 a year.

You can see now why so many people are looking into this option.

Another perk comes for those that are already making a large annual salary. While there are many laws that make it impossible for this group to contribute to their Roth IRA, there is no such requirements with a self 401(k), thus making contributions much easier for higher income folks.

Another favorite of many individuals is the ability to borrow against your solo 401(k). This means that you can use the money in your account as collateral for a loan, and then use that loan for anything you want.

There are some term limits and interests rates you will have to deal with, but having the option on the table is something a lot of people really enjoy.

Another perk is the level of control that you will have over your 401(k) account. A lot of people love the idea of a self-directed 401(k), and why not? It’s their money.

Often times with an IRA there are issues with dealing with whoever is running your IRA and when a great opportunity arises you have to pull too many strings and make a few too many phone calls. By the time you get everything approved and moving the opportunity is often lost.

At this point you are likely asking yourself, “So what’s the downside?” or “Why doesn’t everyone do this?” Quite honestly there is no downside. The reason a lot of people aren’t doing it is because the can’t.

A solo 401(k) has quite a few requirements that make it pretty hard for just anyone to get involved. The only issue that could potentially arise stems if your business starts growing and hiring full-time employees.

Once that happens you will likely have to convert from a self 401(k) program into a full-blown 401(k) offering.

[/vc_column_text][/vc_column][/vc_row][vc_row type=”in_container” scene_position=”center” text_color=”dark” text_align=”left” overlay_strength=”0.3″][vc_column centered_text=”true” column_padding=”no-extra-padding” column_padding_position=”all” background_color_opacity=”1″ background_hover_color_opacity=”1″ width=”1/1″ offset=”vc_hidden-sm vc_hidden-xs”][vc_column_text][the_ad_group id=”39″][/vc_column_text][/vc_column][vc_column centered_text=”true” column_padding=”no-extra-padding” column_padding_position=”all” background_color_opacity=”1″ background_hover_color_opacity=”1″ width=”1/1″ offset=”vc_hidden-lg vc_hidden-md”][vc_column_text][the_ad_group id=”38″][/vc_column_text][/vc_column][/vc_row][vc_row type=”in_container” scene_position=”center” text_color=”dark” text_align=”left” overlay_strength=”0.3″][vc_column column_padding=”no-extra-padding” column_padding_position=”all” background_color_opacity=”1″ background_hover_color_opacity=”1″ width=”1/1″][vc_column_text]Self-directed 401(k)

I mentioned the concept of a self-directed 401(k) earlier. This is something a lot of people don’t even consider when getting their 401(k) set up.

Not only is it somewhat daunting to think about managing that amount of money, but most people use the excuse of time to explain why they could never take their solo 401(k) and make it a 401(k) self directed.

There are quite a few advantages to doing this, however. The number one advantage is that of control.

Who doesn’t want to be in control of their money? Who hasn’t seen a potential incredible investment opportunity at least once in their life and thought it would be a great idea but just didn’t have the guts to go and put money into it?

A self-directed 401(k) gives you that option and has the potential to bring handsome rewards.

I have a good friend who has a 401(k) self managed and he loves it. He developed a passion for real estate in his mid-30’s and has been able to take his retirement to another level by buying investment properties during market lows.

He doesn’t make a large annual salary and so would not be able to take advantage of these opportunities if he was not managing his own 401(k). Instead he now gets to feel the excitement that comes when an investment goes well, he will retire very well off, and he knows exactly what is going on in his 401(k) at all times.

Should anyone get one?

So at this point you are likely asking yourself if you should get a solo 401(k) plan. A lot of that depends on how focused you are on your retirement and how important money is to you right now versus how important it will be to you in the future.

The main benefit of this type of plan is the ability to put quite a lot of your annual salary into your retirement. This is a great option for some people, particularly older folks who have that on their mind a lot more.

If you are a young person with a long time until retirement, you may still want to get into a self-directed 401(k), but not a solo 401(k). I would take the excess money and use it to make more risky investments that could pay off in the shorter term.

Still put away money each month and take full advantage of employer contributions, but don’t max out on the amounts.

Conclusion

In conclusion, there are a lot of confusing laws and factors to think about if you are going to go the route of a solo 401(k). Luckily there are also a lot of resources and people that are willing to help, though usually for a price.

Choose your broker first and they can help you answer a lot of your questions

Another great resource is just to go straight to the source. The IRS offers quite a few different resources on the matter and gives a decent explanation (as decent as a government bureaucracy could offer) here.

They also clearly explain the different words that this type of account can go by, including a self 401(k).

As always I always try to put in a note for learning everything you can. No matter if you decide to go the route of a solo 401(k) or not, it is incredibly important for everyone to know their options and know exactly what is going on with their retirement.

In particular it is important that everyone has a plan and knows what it is.

If you have been thinking about getting started with your retirement but just don’t know where to start try one of our recommended brokers. Any one of them would be able to do a great job at getting you on track to retire with whatever amount you need to live safely and comfortably.

I recommend that if you want to start learning about investing, IRA’s 401(k), or other ways of managing money signing up for the Beginning Stock Trader newsletter.

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