Objective Tax and Financial Planning Guidance for You and Your Retirement Accounts

The Solo 401(k)
Architects, graphic designers, web designers, IT consultants, attorneys, real estate agents (commercial and residential), musicians, landscape architects, financial consultants, coaches, accountants and writers. What do these clients have in common?

They are all self-employed individuals and they all set up the best retirement savings account available for the self-employed - The Solo 401(k).
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Why am I such a fan of the Solo 401(k)? Well, let's take a look by comparing the Solo 401(k) to a Traditional IRA (not really a fair comparison) and the other easy to administer retirement plan for small businesses, the Simplified Employee Pension IRA, a.k.a., SEP-IRA.

As you can see, the advantages of the Solo 401(k) vs. the SEP-IRA are many: Age 50+ catch up contribution, Roth contribution allowed and not limited by income, plan loan allowed, fewer investment limitations, no UBIT on leveraged real estate and the fact that a custodian is optional.

2010/2011 Retirement Plan Comparison Chart

2010/2011 Retirement Plan Comparison Chart
FEATURE

SELF-DIRECTED IRA/IRA LLC

SEP-IRA

SOLO 401(K)
Maximum Annual Contribution

$5,000

$49,000

$49,000
Age 50+ "Catch up"

$1,000

N/A

$5,500
"Roth" contributions

$5,000 if Roth IRA

N/A

$16,500/$22,000 if age 50+
Plan Loan Allowed?

No

No

Yes; Up to lesser of $50,000 or 50% of plan balance
Max. Contribution on $100,000 of Earnings

$5,000/$6,000 if age 50+

$18,587

$35,087/$40,587 if age 50+
Investment Limitations

Collectibles, Life Ins., "S" Corp. Stock

Collectibles, Life Ins., "S" Corp. Stock

Collectibles
Unrelated Business Income Tax on Leveraged Real Estate

Yes

Yes

No
Custodian Required

Yes

Yes

No
Checkbook control available

Yes, if IRA LLC

Yes, if IRA LLC

Yes
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Now, I've heard a few of my CPA brethren tell their self-employed clients that Solo 401(k)s are "complicated" and that they should just stick with their SEP-IRAs. First of all, Solo 401(k)s aren't complicated. It's just that many CPAs aren't used to dealing with them, so it's easier to just tell the client to stick with their SEP-IRA. Don't be fooled so easy. The proof is in the pudding: In almost every important aspect, the Solo 401(k) is a superior retirement vehicle for the self-employed!

If you have questions about how you can benefit from a Solo 401(k), please give me a call or drop us an email.
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Buyer beware!

Large financial services firms like to advertise that they offer Solo 401(k) plans, and yes, you can get a Solo 401(k) at big Bank of the U.S. or Big Brokerage Firm.

But be careful. You'll be limited to the bank's or brokerage firm's line-up of stocks, bonds, mutual funds and CD's. That's great, if that's what you're looking for. But if you want to self-direct your Solo 401(k), you'll need to deal with a firm like Integrated Wealth Strategies, LLC that specializes in self-directed Solo 401(k) plans.