If you’re thinking about starting a solo 401k, here’s a complete guide on how to do it. First, you’ll need to decide if a solo 401k is right for you. Then, you’ll need to choose an account provider and fund your account. Finally, you’ll need to make contributions and withdrawals as needed.
Here’s a More Detailed Look at Each of These Steps:
1. Decide if a solo 401k is right for you
2. Choose an account provider to open a solo 401k
3. Fund your solo 401k
4. Make contributions and withdrawals as needed
Let’s start by looking at whether a solo 401k makes sense for your specific situation. Then, we’ll look at how to choose a plan provider and finally, how to fund and use your solo 401k.
1. Decide If a Solo 401k is Right for You
The first thing you’ll need to do is decide whether or not a solo 401k fits your specific situation. You can choose a traditional or Roth solo 401k as long as you have no other employees besides yourself and your spouse and even then, there are limitations.
If you’re a sole proprietor or single-member LLC, the company that owns your business (not necessarily an individual) and has no other employees besides yourself and your spouse, then a solo 401k may make sense for you. You can establish one with almost any investment firm. You’re allowed to contribute up to $54,000 in 2016, plus an additional $6,000 if you’re over 50 years old. This is much higher than the IRA contribution limits of only $5,500 per year for people under 50 and $6,500 per year for those who are older.
2. Choose an Account Provider to Open a Solo 401k
Once you determine that a solo 401k is the right retirement plan for your small business, it’s time to choose an account provider. There are many options available and there are no one-size-fits-all solutions for choosing the best provider. You should consider things like fees, investment choices, and customer service when making a decision.
If you don’t have a good idea of what investment company to choose, here are some examples of reputable providers: Fidelity, Vanguard, and Schwab. You can also find a full list on the IRS website under “Search for plan sponsors.”
3. Fund Your Solo 401k
Once you’ve chosen an account provider, it’s time to fund the solo 401k. You should contact your account provider and they’ll walk you through opening an account.
Depending on what type of solo 401k you choose (traditional or Roth) and whether or not you have other retirement plan options available to you, there are different contribution limits associated with a solo 401k. For example, if you have other retirement plan options available to you, such as a SEP IRA or SIMPLE IRA, your solo 401k contributions will be limited to $18,000 per year in 2016. That amount goes up to $24,000 annually for people 50 years old and older.