Why Small Business Owners Should Invest in a Solo 401k – Foster Financial

April 25, 2019
Why Small Business Owners Should Invest in a Solo 401k – Foster Financial
small business owner doing finances 401k

Solo 401ks (also known as Self-Directed 401ks) allow the investor to make a variety of different investments and allows a person who is self-employed or is an owner-only business to still get a 401k as a way to save for their retirement. These Solo 401ks are also straightforward to administer and allow for higher tax deductions when compared to their traditional 401k counterparts.

The following are a list of reasons why most those who are self-employed will generally choose a Solo 401k over a traditional SEP or SIMPLE IRA:

Higher Contribution Limits

Solo 401ks have a much higher annual contribution limit to them than the traditional SEP IRAs which only allow contributions of up to 25% of employee compensation while also not allowing elective deferrals or catch-up contributions. On the other hand, the Solo 401k allows an individual to contribute up to $17,500 (as of 2014) which can also get applied to the Roth Solo IRA 401 contributions. “Catch up” funds also allowed the person to contribute $5,500 more to their Solo 401k (as of 2014) which totals $23,000 in total contributions by the individual for the year.

Solo 401k Loan Options Are Available

Solo 401ks have an option available that lets the individual take out loans from their Solo 401k if needed which is not available with the SEP or SIMPLE IRA. The personal 401k loan is also available to Solo 401k participants and allows the person to take up to 50% of the account value if it is not more than $50,000 out of the account at a time. It’s a perk and benefit that many people appreciate if they are “in a pinch” or need the cash to help out their business during a bad time.

Business Funding & Investment

Those above $50,000 personal loan can be taken out to help invest back into the business or for business projects or funds of any sort whenever the person needs to do so. Remember, however, that loans cannot exceed 50% of your account value. For example, if you have $80,000 in your Solo 401k you can’t take $50,000 as that is more than 50% of the account’s total value.

Self-Directed Solo 401k Investing

Your self-directed Solo 401k investing can go into a variety of different investment options including stocks or mutual funds or other alternative funds such as real estate, precious metals, tax liens, private placements, etc. You also don’t have to pay taxes until you make taxable distributions with the money in your Solo 401k.

Roth Contributions

Solo 401ks allow you to make contributions to your Roth Solo 401k unlike both the SEP or SIMPLE IRA. Your contributions are capped at $23,000 annually for 2014, and there are no income restrictions on who can have these accounts.

Straightforward & Inexpensive To Administer

The Solo 401k is not subject to Form 5498 as SIMPLE and SEP IRAs. You can also serve as the Trustee to your own Solo 401k and keep the alternative paperwork instead of having to pay a 3rd party custodian to keep the paperwork such as Pensco Trust (helps cut down on the fees you will owe). Avoiding all of these extra hassles make the Solo 401k easy to own, manage, and administer as well as relatively inexpensive to administer.

Exempt from UBIT

Unlike SEP and SIMPLE IRAs which use the debt financing to invest in real estate and have to pay unrelated business and income taxes, the Solo 401k is exempt from such taxes concerning real estate investments.

Great Consolidation Tool

Anyone who is looking for a great consolidation tool should consider the Solo 401k as a great way to consolidate other accounts such as your 401k, 403b, etc. all into one account. You can do this if you are self-employed with no full-time employees.

All of these benefits and perks of using a Solo 401k makes it one of the most attractive options to individual the self-employed or those who own their own business.


To open your Solo 401k and to start saving for your retirement today please feel free to contact us at Foster Financial CPA for further assistance and to get started saving for your future immediately! It’s our pleasure to help!