Life as an independent contractor or small business owner can be complicated, with requirements, rules, and the dreaded tax regulations at every turn.
Most workers appreciate anything which helps to make their lives that little bit easier, and this is where a Solo 401(k) can become your new best friend.
Since you are responsible for all of the benefits you would receive as a traditional employee, including a retirement plan, a Solo 401(k) is an ideal way to save while avoiding hefty fees or taxation.
Best Solo 401(k) Providers
RocketDollar offers one of the most affordable options for a self directed 401(k). A self directed account means you get to choose all the investments and are not limited to stocks and bond based options.
So you could use your retirement money for real estate, or small business ventures, ore whatever investment you can come up with. This make Rocket Dollar a top option if you want to have that much control.
TD Ameritrade is one of the most well known names in online investing. They are a full service brokerage that has access to any type of investing you want.
The best feature of TD Ameritrade account is that they have over 300 ETFs for you to choose from that are 100% commission free. This means you can trade in and out of them without having to worry about brokerage fees.
E*Trade revolutionized the brokerage world when they emerged as a completely online brokerage. They now offer a full suite of investing tools and products and that includes Solo 401(k) options.
Another viable alternative can be found at Charles Schwab. They offer a service which is tailor-made for small business owners who find that they require additional banking or brokerage services. Unlike Vanguard, they provide a full variety of services, including consumer banking, lending facilities, and investment advice.
A variety of investment opportunities are available, such as:
- Bonds: Companies, counties or municipalities can issue individual bonds, and these can be actively traded within a Solo 401k account.
- Stocks: An account also allows you to actively trade any stocks from individual companies which are traded over the counter, or on the exchange.
- Target Date Funds: In the same fashion as Vanguard, Schwab’s can also offer target-date funds, as well as providing the opportunity to access these from a third party
- Mutual Funds: Thousands of funds are available through the trading platform, as well as the Schwab’s proprietary mutual funds.
- ETF’s: These can be traded at no cost if obtained from Schwab, and there are also a range of external options available.
Unlike Vanguard, Charles Schwab is also able to offer a variety of other services, such as:
- Lending options: Schwab operates as apart of a banking group, and so can arrange loans for eligible clients.
- Online Securities Brokerage: The trading platform allows investors to access stocks, ETF’s, bonds and a wealth of other traded securities.
- Business banking: In addition to the other services, Schwab is also a fully-licensed commercial bank. They can provide valuable services to businesses such as cash management, checking, and savings accounts
- Advice: A key bonus is the ability of Schwab to provide individual guidance on choosing investments.
Cost is a carefully managed factor within the company, and you will not be charged monthly or annual fees on your account. Instead, account holders are charged a commission for each trade in their account.
These can quickly add up to as costly figure, and so this may not be the best account for those with diverse trades or regularly-scheduled contributions.
These commissions are $4.95 for all US stocks, $4.95 plus $0.65 per contract for all options, $5.95 for any foreign stocks, and $1 per bond on all trade bonds.
Charges are waived for any trades held in Schwab’s proprietary ETFs or mutual funds. In addition, services such as lending or banking may incur a charge.
When it comes to customer service and personalized individual advice, Fidelity is a safe bet. They have the most extensive network of nationwide offices, meaning their physical presence is easily found. This ability to access personal and individual assistance is the unique selling point of the company, and a draw for anyone looking for a unique touch in an often online world.
Like its competitors, Fidelity offers a range of opportunities for budding and experienced investors.
- Stocks: Equity shares in any company which is traded on the national exchange are eligible to be traded in a Solo 401k account.
- Mutual Funds: Fidelity’s mutual funds are individual stocks/bonds which are professionally managed and diversified. Obtaining these from Fidelity or a third party are both options.
- Target date funds: As we have seen elsewhere, these are carefully managed to help you prepare for retirement.
- ETFs: Similar to mutual funds, these are traded on the exchange and are usually focused on asset classes or sectors.
- Bonds: Bonds are shares of debt which are traded in the secondary market and issues by countries and companies.
- FDIC-insured CDs: Certificates of Deposit are also available with Fidelity.
In addition, there is a range of extra services offered by Fidelity.
- Investment Advice: One of their key selling points is the one-to-one attention and advice that customers receive. Whether you are a new investor or looking to expand your portfolio, you will be able to receive guidance and support from a real person.
- Cash Management: As they offer commercial banking services, Fidelity will also be able to provide advice on businesses funds, rebalancing, and automated contributions.
- Education Savings Plans: No matter the age of your child, it is never too soon to start saving.
- Brokerage Service: The trading platform allows the trading of ETFs, stocks, bonds and more.
- Life Insurance: In addition to other products, Fidelity also offers Universal Life, Term Life, and Long Term, Care insurance plans.
- Annuities: Fidelity will also assist you with the process of purchasing an annuity contract if your annuities are separate from your 401k, such as in a retirement savings strategy.
In a similar way to Schwab, there are no annual fees –all charges are on commissions. These are $4.95 per trade for all US equities and $1 per bond for US bond trades.
In addition, there are commissions for trading stocks in 25 foreign markets—the exact amounts vary by currency—and fees for wire transfers and other services.
As a rule, these charges are $10 per cashier check, $15 per returned check, $10 for bank wires which are initiated online, and up to 3 percent for any foreign wires.
This is an option which often tops the polls thanks to the simple, no-frills offering.
Vanguard is the largest mutual fund company in the world, handling over $4.5 trillion in assets, and have access to over 100 funds, all professionally-managed.
Their flawless reputation speaks for itself, and the lack of extra services allows them to keep costs low and affordable. Vanguard can offer a range of opportunities for investors, including:
- Bond Funds are debt-focused mutual funds and include a portfolio of bonds which are designed to add interest income to a portfolio.
- Equity Funds focus investments in small, mid, or large-cap stocks with the aim of price appreciation.
- Money Market Mutual Funds invest in short-term debt and CDs, providing their investors with a small interest rate and high liquidity.
- International Funds seek to benefit from currency fluctuations through investments in foreign assets.
- Target Date Funds automatically shift away from stocks and into bonds or other safe investments as you grow closer to retirement.
Part of the appeal of Vanguard is the lack of frills or extras, and so they do not offer services such as checkbook control, loan facilities, standard banking services or the option of one-to-one assistance or guidance.
Solo 401k’s are often approached with caution due to the costs involved, but this is an area Vanguard make clear and straightforward.
You will not be charged trading costs or maintenance fees, and there is a charge of just $20 per year for each fund in the plan. This fee is waived for those who are eligible for Flagship Select, Flagship Voyager Select, or Voyager Services.
What Is A Solo 401(k)?
A Solo, or Individual, 401(k) is an option which was introduced in 2002. It is an ideal option for small business owners, allowing a saving of up to $56,000 through profit contributions, along with tax-free salary deferrals.
Previously, contributions were limited to the usual amount of an employee 401k deferral ( a rate which currently sits at $16,500 per year). The change, however, allows for an employer contribution for up to $49,000 per year—the same as a SEP-IRA.
This change makes it a far more attractive option, but it also comes with extra requirements, such as a plan document. This process is something which can be achieved at most brokerage options, and is lengthy but ultimately not too complicated.
There is a range of benefits associated with choosing a Solo 401k, including:
- Higher catch-up contributions
Once you reach the age of 50, you will be able to add $54,500 per year into a Solo 401k, compared to $50k for a SEP-IRA.
- Higher contributions
If you are earning less than $254,460 a year, you will benefit from higher allowable contributions.
Another brilliant benefit is the ability to borrow from a Solo 401k – a feature which is not available for SEP-IRA.
While it is recommended that you allow your pot to grow rather than using it as a loan, it is comforting to know that the option is there in case of an emergency.
- Roth Contributions
A Solo 401k allows you to designate your ‘employee contributions’ as Roth contributions, allowing more money to be saved in a tax-safe way. It also offers a myriad of tax diversification bonuses.
- Roth Conversion/Backdoor Roth IRAs
When one is converting non-deductible IRAs to Roth IRAs, the pro-rata calculation must be included for SEP IRA’s. This is not the case for Solo 401Ks.
- Asset Protection Benefits
If you are in MN or OC, additional protection is given to 401ks against creditors. This change can come in handy at an unexpected moment.
So, Which Is Best?
If you decide to opt for a Solo 401k, you will have plenty of choices with the vast range of options available on the market.
Each has its benefits and disadvantages, and it is worth taking the time to shop around and ensure that you secure the best deal for you.
Best Solo 401(k) Providers Bottom Line
Choosing the best provider for your Solo 401k account can be a tricky business, and the decision comes down to personal preference.
Do you require a particular service, or are you willing to sacrifice frills and extras in exchange for a lower cost? No matter the result, you can rest assured that your money is well placed when you invest in a 401k account.