How Solo 401(k)s Work

Estimated reading time: 3 minutes

Since the creation of the Solo 401(k) in 2002, self-employed individuals and small business owners have been able to utilize these accounts to grow their retirement wealth exponentially. 

The Solo 401(k) is one of the most powerful IRA accounts to self-direct and has many financial benefits. These advantages include exemptions from certain Unrelated Business Income Tax (UBIT) and the ability to have checkbook control. 

While the Solo 401(k) may be very beneficial to some, it is critical that you understand all of the qualifications and maintenance required by a 401(k) before deciding to open the account at a financial custodian.

To establish a Solo 401(k), certain qualifications must be met. An individual must be either self-employed, a company owner that receives W-2 wages, or an individual with no common-law employees. Once these requirements have been met, you can start to take a look at whether a solo 401(k) is the best option for you. 

Benefits of a Solo 401(K)

Solo 401(k)s are powerful investments and wealth-building vehicles. Some of their advantages include:

Checkbook Control:

Maintaining this type of checking account allows for check writing authority by the trustee. Using a 401(k) is a great way to obtain checkbook control, without the dangers of the IRA LLC Checkbook Control model that has come under fire recently. 

Larger Contribution Limits:  

The business owner wears two hats in a Solo 401(k) plan: employer and employee. Contributions can be made to the plan in both capacities, allowing up to $58,000 in contributions for 2021. 

Loans to yourself: 

Unlike with your IRA, you can borrow money from your Individual 401(k). You are able to loan yourself the lesser of 50% of your account balance or a maximum of $50,000. Loans are based on a 5-year amortization at market rates.

Exemption from UDFI:  

One of the major benefits of real estate investing through your Individual 401(k) is the exemption from Unrelated Debt-Financed Income (UDFI) taxation.

Disadvantages of a Solo 401(K)

Conversely, there are some serious potential disadvantages that come along with maintaining a Solo 401(k). Some key dangers to be aware of while evaluating your need for a 401(k) include: 


In order to legitimize a newly established 401(k), the employer or employee must make a contribution for the tax year in which the account was established. See IRS Publication 560 for minimum funding requirements.

Reporting requirements:

The account holder has sole responsibility when it comes to tax reporting requirements. A 1099-R must be filed if any distributions are taken from the 401(k) and a 5500 or 5500EZ must be filed once the account value reaches $250,000+.

Dangerous responsibility:

Your transactions are not overseen by your custodian, allowing more room for potential trouble or prohibited transactions. 

Record keeping:

Careful record keeping must be kept for the multiple accounts held in the 401(k). Often time this bookkeeping is tedious, so it’s important to make sure good records are kept. 

In Summary

The Solo 401(k) is one of the most powerful retirement accounts you can have, and understanding how they work is the first step in deciding if it’s the right investment strategy for you. 

To learn more about how to get started investing with a self-directed IRA, schedule a 1-on-1 consultation with an IRA Specialist by clicking HERE. Click here to view our Solo 401k FAQ page.

Solo 401(k) Contribution Limits and Rules: A Complete Guide

Estimated reading time: 5 minutes

Saving for retirement is something many people put off until later, but that’s a big mistake. A 2018 Federal Reserve report found that nearly one-quarter of American adults don’t have a pension or any retirement savings. For the self-employed individual or small business owner, it can be even harder to save for retirement. It’s important not only to save, but to put your money to work in appropriate investment vehicles. One option is a Solo 401K qualified retirement plan, which allows self-employed individuals and small business owners to save retirement funds with pre-tax contributions. This type of plan gives you the opportunity to save significant amounts of money each year, while also providing certain tax benefits.

How is it Different from a Regular 401K and Who’s Eligible?

A regular 401K is a type of retirement account sponsored by an employer. When you save a percentage of your paycheck, the company makes an employer contribution, which often matches the employee contribution up to a specified percent. With a Solo 401K, you can make contributions as both the employer and employee. 

Before you get started, it’s important to understand the eligibility requirements to open a Solo 401K. A Solo 401K is a retirement account designed for self-employed individuals or small business owners with no full-time employees other than themselves and their spouse. There are no restrictions on age or income.

What are the Advantages of a Solo 401(k)?

One of the most popular features of a Solo 401K is that it allows you to have checkbook control over your retirement funds. Checkbook control is the ability to write checks directly from your retirement account to make investments. This allows you to pay expenses and have direct access to your retirement funds, which can provide greater flexibility.

Another benefit of a self-directed 401K is it provides an exemption from Unrelated Business Taxable Income (UBTI), which includes Unrelated Debt-Financed Income (UDFI). UDFI refers to income that is generated by debt-financed assets that are held within a tax-exempt entity, such as a retirement account. This type of income can be subject to UBTI tax, which can significantly reduce the investment returns within your retirement account. However, if you set up a Solo 401K plan, you may be able to avoid UDFI and UBTI tax altogether.

Additional advantages of a Solo 401K retirement plan are that you can make larger contributions than you could with other types of retirement accounts, such as a traditional or Roth IRA, and the contributions you make to a Solo 401K are tax-deductible, meaning you can reduce your taxable income for the year. Plus, you have the ability to loan yourself money.

What are the Disadvantages of a Solo 401K?

If you want to set up and manage a Solo 401K plan, be prepared to put in time and effort. You’ll need to think carefully about the plan design, pick a custodian or trustee, and make sure all contributions and distributions are properly recorded and reported. For some self-employed people, this can be a lot of work and might discourage them from setting up a Solo 401K. It’s up to you to make sure the plan follows all IRS regulations. This means filing annual reports, making contributions on time, and only investing in permissible assets. If you don’t comply with these rules, you could face some hefty fines and tax consequences.

What are the Contribution Limits and Rules for a Solo 401K?

A Solo 401K contribution has two standard parts: an employee salary deferral contribution and an employer profit sharing contribution. The maximum salary deferral contribution for 2022 is $20,500 and $22,500 for 2023. If you’re 50 or older, you can make a $7,500 catch-up contribution in 2023.

Employer contributions can be 25% of employee salary or 20% of business earnings, depending on the business’s organization. The combined employee and employer maximum contributions are subject to the lesser of 100% of compensation or $58,000 in 2022 or $61,000 in 2023. Catch-up contributions don’t count toward this limit, which means you can actually contribute $67,500 in 2023 if you are over the age of 50. Also, contribution levels for salary deferrals and profit sharing can be adjusted as business income fluctuates.

How Can I Open a Solo 401K?

Most online brokers and some custodians can help you set up a Solo 401K; you’ll just need an employer identification number (EIN) first. The broker provides the paperwork, which includes a plan agreement and account application. Set up your account before December 31st to make an employee contribution for the current tax year and contribute by the tax filing deadline.

Another option is to open a Solo 401K as a self-directed IRA. A self-directed IRA is legally no different than any other IRA, but it allows more flexibility by allowing you to invest in alternative assets, such as real estate, promissory notes, and private placements, which many off-the-shelf providers do not allow. It’s important to note that custodians can’t give tax, legal, or investment advice for a self-directed IRA, so the account holder is responsible for all of the research and management of the assets and should contact their tax advisor as needed. The account holder is also responsible to perform due diligence on the investment opportunity and its sponsor to ensure it is a sound investment. For those that are interested in real estate investments and other alternative assets, self-directed IRAs do put the control back in the hands of the investor.

Solo 401K for Retirement

The earlier you start saving for your retirement, the better chance you have to achieve your retirement goals, and a Solo 401K can be a great tool for investing in your retirement. It’s important to do your research to make sure this plan is right for you, and you are prepared to handle the management and administration required. Adhere to the rules for a Solo 401K, and you’ll have many years of sound investing.

Need help getting started with your Solo 401K? Open a Quest Solo 401K account here. To learn more about how to get started investing with a self-directed IRA, schedule a 1-on-1 consultation with an IRA Specialist by clicking HERE.

Can I Move My 401k Into a Self Directed IRA?

Estimated reading time: 3 minutes

Did you know 45% of Americans fear they will run out of money during retirement?

If you have started taking more steps towards planning for retirement, then you are already ahead of the game. Those who want to be more in control of their money typically like to explore the options available, like a self-directed IRA.

What Is a Self-Directed IRA?

In short, a self-directed IRA has many similarities with other traditional IRAs. With a self-directed IRA, you can get tax advantages that will help you save for retirement. 

However, it’s essential to keep in mind the IRS will limit the types of investments you make. The IRS will allow your self-directed IRA to make investments in real estate, developmental land, mineral rights, cryptocurrency, and livestock. 

How Does a Self-Directed IRA Work?

If you plan to switch to a self-directed IRA, the first step is to pick a custodian from a brokerage or investment firm. The custodian’s job is to manage the IRA assets and coordinate the sale and purchase of the investments. 

Keep in mind the same rules of a traditional IRA apply to self-directed IRAs. For 2020, the maximum IRA contribution is capped at $6,000. However, those over the age of 50 can make an additional contribution of $1000 to catch up. 

Who Should Switch to a Self-Directed IRA?

If you’re wondering about switching to a self-directed IRA, it’s important to learn if it’s the right move for you. Those who decide to switch to a self-directed IRA do it for several reasons. 

You want to diversify your portfolio and plan to split your savings between a conventional IRA and a self-directed IRA.

You’re worried about your retirement investments after the 2008 financial crisis and want a safer investment. 

You’re an experienced investor in a specific type of investment, such as real estate. 

How to Set Up a Self-Directed IRA?

To qualify to set up a self-directed IRA, you need to fulfill specific requirements. For starters, you need to prove you earned taxable income during the current financial year. 

Some employers might offer their employees the option of enrolling in a self-directed IRA.

To set up a self-directed IRA, you can start by requesting the transferring of funds from the traditional IRA to the new one. Some people choose to transfer any profits they make into a self-directed IRA. Another way to do it is by deferring income directly to the account.

Can You Move Your Managed 401k?

The short answer is yes. However, you need to consider if it’s the right move for you. Remember to learn how a self-directed IRA works, who can benefit from one, and all pertinent details. 

A self-directed IRA could be a great move for you. To learn more about how to get started investing with a self-directed IRA, schedule a 1-on-1 consultation with an IRA Specialist by clicking HERE.

How to roll over your 401k plan into a Self Directed IRA

Estimated reading time: 5 minutes

If there is one thing that 2020 has taught us, it is that nothing is as certain as it was before.  One of the biggest fears for many Americans right now is their job security.  Many people have already lost their jobs and are wondering what comes next for them.  A major effect of leaving a job, whether it be through retirement, layoffs or simply moving to a new company, is that your 401(k) from your previous employer becomes eligible to be rolled over to an IRA.  

There are a variety of different options that become available to you with your previous employer 401(k) and we have listed the 3 most common options:

1) Moving the funds into an IRA 

If you were a part of a 401(k) plan at your previous employer, one of the most common options available to you on what to do with the funds is being able to move the funds into an IRA at a new custodian. When you leave your job, you have the ability to continue investing those funds on your own in an IRA or Self-Directed IRA, and when moving those funds to another qualified retirement account, you don’t experience any tax hits. 

One thing you would want to consider is what type of investment you plan on doing because this will help you determine the perfect custodian for your needs. Some Americans choose to put their money in a regular IRA and hand their money to a financial advisor at a public custodian to make all the decisions about their account for them. Others choose to take control and invest with a Self-Directed IRA at a non-traditional custodian that will hold private assets. 

You may be thinking about what the difference is between those two types of IRAs. A Self-Directed IRA is simply an IRA in which the IRA owner directs all investments in the account. There is no legal distinction between a “Self-Directed IRA” and any other IRA except with a truly self-directed IRA the account agreement allows the broadest possible spectrum of investments, which could include real estate and private or start-up companies. Understanding the difference between these two accounts shows that there are many options available just within the first category!

A great reason why many people choose to move their funds to an IRA rather than pulling out their 401(k) money is the magic of compound interest when you continue to reinvest. To put it simply, compound interest is “interest on interest”. It may be easy to think that taking a distribution from your retirement account is a quick way to get a big portion of money, and although you may not be wrong, the amount of money you COULD have if you left it inside of your account is exponential. When you take a distribution, your IRA is no longer growing, but when you continue to do deals inside of your account and reinvest those funds, your self-directed IRA is still making money for you. 

The most important part about moving your funds to another custodian is making sure you find your fit. Not all custodians focus on the same thing. Where some custodians like Quest have a focus in free, expedited funding times and IRA education, others boast flashy software or new automated phone lines. Being comfortable with your custodian will make you more comfortable and confident as you take the next step for your financial future. 

2) Leave the funds in a 401(k) 

If the thought of dealing with your 401k is too overwhelming, you may have the option to leave the funds in a 401(k), whether that be with the employer you just left or with your new job. Some employers allow you to keep your plan with them even if you no longer work for them. Even though you’re unable to contribute to the account, your money can still be invested and grow tax-deferred, but contacting the HR department of your previous employer to learn more about the restrictions and opportunities your plan has is recommended. You may also have the option to take your 401(k) plan with you to a new job if you find one.

3) Take a distribution 

During this time, if you need funds to help cover costs like a mortgage payment and immediate expenses, you may be considering taking money from a 401k account. Using 401k funds now to pay for expenses could mean that later when facing retirement, you don’t have that same amount available. The funds in the account also won’t be given a chance to grow during the next decades to build up for your future retirement.

Usually, taking money from your 401k leads to penalties and taxes, but the good news is that the recently passed CARES Act may help with some of these costs. Before the act, rules stated that those who were not 55 years old yet would face a 10% penalty on the amount taken out of a 401k after being relieved from/leaving your job. The CARES Act addresses the COVID-19 crisis and offers temporary adjustments to 401k withdrawals. This allows withdrawals up to $100,000 from your 401k account without paying the 10% penalty provided your distribution meets the criteria. The CARES Act also allows you to spread out the taxes on the withdrawal over the next three years. If the money is paid back within three years, you can avoid being taxed on the distribution that was taken out. This could be a good option for those who need money now.

Being aware that there are many different options, especially with a Self-Directed IRA, may be able to provide some peace of mind in knowing that not all is lost and that you can take control. If you need an IRA specialist, at Quest we are here to provide education no matter what option sounds the best for you. With our weekly webinars featuring investing education or our certified IRA specialist just a call away, rest assured knowing that your money is safe!

To learn more about how to get started investing with a self-directed IRA, schedule a 1-on-1 consultation with an IRA Specialist by clicking HERE.

Keep your 401k plan on the right track

Estimated reading time: 2 minutes

Many adults pay into 401k plans without fully understanding what the investment means. There is certainly the overarching understanding that a retirement plan is for life after working a corporate job. 

What does a healthy 401K account look like, though? You may want to consider the following concepts when determining if your retirement plan is on the right track.

How often do you pay into your 401k plan?

Employee contribution is the primary source of your retirement plan. You cannot expect to retire in riches when you only pay into your 401k account every quarter. 

In a similar vein, the amount that you invest is also important. Those who choose to give higher percentages of their paychecks will naturally see more returns than those who invest less money in their 401k plans every two weeks.

Did you roll funds from a previous account into your new 401K plan?

Cashing out your retirement savings when you change jobs is not always the best way to plan for the future. Many working adults find themselves spending the lump sum of money irresponsibly even after promising to invest the money from a previous 401k plan in stocks.

It is often best to roll over the money from your former 401k policy into your new plan without even considering how much you would receive from a big cashout. Conducting business in this manner allows you to continue to build for the future without the temptation of instant gratification.

Does your company contribute to your 401k plan?

You should not rely on your employer to make your dreams of financial stability after retirement a reality. It is, however, good to work for a company that invests in the futures of its employees. 

The best businesses match employee contributions to 401k plans. Even those corporations that contribute less than half of what you give are still providing money from which you may benefit in the future.

Is your 401k plan ready for retirement?

The amount that you need to comfortably retire depends on a number of factors, which are not limited to the type of lifestyle you want to have after leaving your mainstream job. It is also important to consider the amount of debt you may have after retirement. Making higher contributions to your 401k and ensuring that all monies from previous plans have rolled into your new account are the best ways to optimize your retirement plan for the future.

Quest Trust Company offers an individual 401k as well as many other retirement savings options, including self-directed IRA and Roth IRA accounts. We offer truly self-directed investment options as well as fast processing times and low fees. Contact a financial expert at Quest Trust Company today to open an account today.

Steps to set up a solo 401k

Estimated reading time: 2 minutes

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401k accounts are retirement accounts that are set up and managed by your employer. However, if you are a freelancer or entrepreneur that runs your own business, you may want to set up a 401k just for yourself. 

Many people don’t realize they have this option, but it’s a great way to build up your savings for retirement. Setting up a solo 401k can be tricky at first – here are the basic steps to get started.

Choose a 401k provider

The first step to opening a solo 401k is choosing a provider. Many financial institutions offer solo 401ks to their customers, so they’re fairly easy to find. There are several things to take into account when choosing a 401k provider, but the most important factors are fees and investment options. 

You’ll want to make sure your provider has investment options you like, and that you have enough flexibility when putting your plan together. You should also look for a provider with low fees, as high transaction fees can really add up.

Fill out your application

Once you’ve decided on a provider, you’ll need to work with them to fill out your paperwork and get the account set up. 

You’ll need to fill out your employer kit with a plan adoption agreement for a solo 401k. These are complex and can be confusing to fill out on your own, which is why it’s so important to have a provider you trust walk you through them. 

You will also need to prepare your employee disclosures about your business to send to the IRS for tax purposes.

Open your account

Once you have all of your paperwork filled out, you can set up an account and make contributions as you see fit. Since you are both employer and employee, you can make one sum contribution instead of worrying about employer matching.

When you’re setting up a retirement account, it’s important to make sure you’re working with a reputable financial institution you can trust. 

Quest Trust Company offers an individual 401k as well as many other retirement savings options, including self-directed IRA and Roth IRA accounts. We offer truly self-directed investment options as well as fast processing times and low fees. Contact a financial expert at Quest Trust Company today to set up your account.

How does a Solo 401k Work?

Estimated reading time: 2 minutes

Solo 401k plans are employer-sponsored retirement accounts that offer self employed individuals with no common law employees other than a spouse the opportunity to establish a Profit Sharing Plan. 

Many companies offer solo 401k accounts to their employees, but not many people understand exactly how they work. 

Here’s what you need to know about your solo 401k before you get started:

You are the Employer and Employee of the Account

Although your solo 401k is an employer plan, it allows the business owner to be the Trustee of the plan, granting them access to make fiduciary decisions.

The Trustee will work with a financial institution to set up the account, and they will determine where to hold the funds, how much you contribute to the plan, and what investment to partake in. 

Rollover of previous accounts into the Solo 401k

You may have pre-existing 401k plans or IRA’s that you may want to consolidate inside of your Solo 401k. As long as those funds are pre-tax they can be rolled into the plan.  

If you are looking for a Roth Solo 401k, you may conduct “in plan Roth conversions” to convert your pre-tax funds to Roth. 

You are not able to move Roth IRA’s or previous Roth 401k’s into your solo 401k. However, You are able to contribute to a separate Roth IRA if you have one while continuing to make contributions to your Solo 401k. 

Taxes Advantages

By Contributing to your solo 401k and possibly to another Traditional IRA, you may be eligible to receive a tax deduction. This all depends on your modified AGI (adjusted gross income) in determining if you are eligible or not. 

Keep in mind that Solo 401k accounts are retirement accounts and non-qualified distributions are subject to penalty and taxation. The Solo 401k does have an option to take a loan out but it is limited to 50% of the account balance.

If you’re looking to set up a retirement account, contact the experts at Quest Trust Company today. We offer Self-Directed IRAs and Solo 401k plans for individuals looking to invest into alternative assets. Our financial experts can help you find an account that makes sense for your financial needs.

How to Rollover 401k to IRA

Estimated reading time: 3 minutesAfter leaving a job, you may be wondering what on earth you should do with your old 401(k) funds. There are a few options to consider, each with their pros and cons. Always consult your financial advisor before transferring funds, as they can offer advice on which type of transfer is best for your stage of life and how to move the funds hassle-free. Your 401(k) options include:

    • Keeping your funds where they are
    • Rolling the funds into an IRA or Roth IRA
    • Transferring the funds into your new 401(k)
  • Cashing out

If you keep the funds where they are, your old employer won’t make any matching contributions, and you may not be able to make any contributions yourself depending on your employer’s specific rules. You will also be limited to the plans they provide or the fees they entail, which you may or may not like. Consolidating your 401(k) funds into a plan of your new place of employment will keep things simple and all in one place. If you change jobs frequently, having multiple plans sitting at each old place of employment may get confusing.

Cashing out is usually only utilized as a last resort option. You may be subject to a 10% fee if you are younger than 55 or between 55 and 59 but still working. You can avoid the 10% fee if you are older than 59 ½ or you are between 55 and 59 but are retired. What you withdraw will also be counted as taxable income and may bump you to a higher tax bracket. If you need to supplement your income until you have a steady stream once again, most advisors suggest only withdrawing the absolute minimum necessary and rolling over the rest into an IRA.

Rolling Over a 401(k) to an IRA

If your employer writes a check directly to you for the funds in your 401(k), you will have 60 days to deposit those funds into a new qualified plan. Failing to deposit the funds within 60 days will result in taxation on the funds since it will be considered income, as well as a 10% fee if you are not 59 ½ yet. Furthermore, the IRS requires that your employer withhold 20% of the funds just in case you don’t make the deadline, so they are guaranteed their tax money. If you make the deadline, however, you should receive the 20% back at tax time. You can avoid all of this by doing what’s called a “direct transfer” from the 401(k) account into your new IRA account. This is usually done electronically as long as you have an account set up with a qualified institution already.

If you transfer a standard 401(k) into a Traditional IRA or a Roth 401(k) into a Roth IRA, everything should go smoothly. If you transfer a standard 401(k) into a Roth IRA, you will likely owe taxes on the amount. This may be advantageous if you are expecting the tax rates to be higher than they are now at your retirement since Roth IRA distributions are tax-free. Before converting, always seek the advice of your financial advisor.