Open a Solo 401(k)

Do you think you might qualify to open up a Solo 401(k)? Check out this video to find out!

This type of account is one of the most common retirement accounts in the United States, which takes funds pretax from an employee’s wages.

Solo 401(k) question? Look no further! We’ve gathered your most frequently asked questions about the individual or solo 401(k) and listed them for you here. If you’ve ever wanted to get more information about whether a solo 401(k) is right for you, or you just have some ongoing questions about your existing account, Quest is ready to provide the best education to help give you all the information you need. Check out our solo 401(k) FAQ page below!

Check out this blog on Understanding Self-Directed Employer Plans and Which One is Right For My Business

Answers to some of the most frequently asked investing questions (FAQs) about Solo 401ks

What is a solo 401k?
A Solo 401(k) is a retirement account for self-employed individuals or business owners with no full-time employees. This account has quite a few advantages other accounts don’t offer, but also has many things to be aware of to make sure it’s being administered correctly

How do I set up/open a solo 401k?

You will need to find an Individual Solo 401(k) plan document provider, like Quest. Then, you will complete the plan and trust documents to create the 401(k) plan, obtain a 401(k) EIN, and establish a checking account for the Solo 401(k). Getting the EIN can be done directly through the IRS website, by visiting www.irs.gov.

Can I buy real estate with a solo 401k?

Buying real estate with an IRA or a solo 401k certainly can be done! You just need to find a custodian that will hold non-traditional or ‘alternative’ investments. Quest Trust Company’s Individual 401k plan documents allow the plan holder to act as the Trustee, Custodian and Plan Administrator, giving them complete investment authority to execute investment in the name of the 401K plan, like signing the real estate purchase contract or cutting a check for earnest money.

How do I use a Solo 401(k) to buy a house?

Once your 401K plan and checking account have been set up for investing, you will then locate the house you want to purchase and complete the purchase contract in the name of the 401K plan, and sign as the plan Trustee. Ex: “[401K plan name], [Trustee Name], Trustee”. If earnest money or an inspection is needed, the Trustee would directly pay these expenses from the 401K plan, via the plan’s checking account.

What is required in order to have a solo 401k?
Self-employed individuals and business owners without any non-owner employees are eligible to have this account. Owner’s spouses may also participate if they are working in the business, as well.

What are some of the advantages and disadvantages of a Solo 401(k)?
Some of the most common advantages of a Solo 401(k) are checkbook control, possible exemption from certain UBIT, and even the ability to loan to yourself. On the other hand, there are some disadvantages including much more reporting and bookkeeping responsibility, and it can also sometimes be more expensive.

What do you mean when you say “legitimized”?
In order for your Solo 401(k) to be safely protected, its important to make a contribution to the account in the year it is established to show that the account is in fact being used for the correct and legitimate purpose. 401ks are classified as defined contribution plans, which are designed for the employee and or employer to contribute too. It is always best to check with your CPA if you have questions about legitimizing.

What is considered Self-Employment income?
Self-employment income is earned from carrying on a “trade or business” as a sole proprietor, an independent contractor, or some form of partnership. To be considered a trade or business, an activity does not necessarily have to be profitable, and you do not have to work at it full time, but profit must be the end goal. Some examples of self-employment income are: contract work, freelancing, driving for Uber and Lyft, working a full-time job and a part-time side gig, receiving a Form 1099-MISC, or even hosting a property on Airbnb.

What is needed to fully establish 401(k)?

You will need to complete the account paperwork, obtain an EIN, and establish a checking account for the Solo 401(k).

How do I get an EIN number?
This can be done directly through IRS website, by visiting here. For the specific steps on how to complete this EIN number, reach out to a Special Accounts Specialist at 855-FUN-IRAS (386.4727) for step-by-step instructions.

Can I use any bank for my Solo 401(k) checking account?
You may use any bank since the account is simply a trust checking account to hold your money. Your real Solo 401(k) account is your set of IRS-approved documents. The bank account is simply a depository for your funds.

What happens if I end up over-contributing to my Solo 401(k) (employee pre-tax) for 2022? Can I remove it without any tax consequences to the Solo 401(k) plan?

In this case, no reporting applies since you removed the contribution before April 15, 2023. Note that when determining if the removal of excess annual Solo 401(k) contributions is reportable and/or taxable, you need to take into account the removal deadline and the contribution type, meaning if it was made as the employee or employer profit sharing.

Can I make both Solo 401(k) and Traditional IRA contributions for the same year?
Yes, you can contribute to both your Solo 401(k) plan and your IRA in the same year. Since you are also contributing to a Solo 401(k) plan, the IRA contributions may not be fully tax deductible. It comes down to your modified AGI (adjusted gross income), which means you may be able to deduct some of your IRA contribution.

If I already have a full-time job as an employee, can I still open a Solo 401(k) plan for my side business?
If you are self-employed or have income from freelancing, you can still open a Solo 401(k) plan. You won’t be able to make pretax or Roth Solo 401(k) contributions if you have already maxed out these contributions to your day job employer 401(k) plan, but you will still be able to make profit sharing contributions to the Solo 401k plan.

Can I rollover/transfer my current retirement plan to a Solo 401(k)?
The type of plan or account from which you are intending to roll/transfer the funds will determine its portability. If the funds are in a rollover or conduit IRA, Traditional IRA, SEP IRA, TSP, 457b, pension, a profit-sharing or a former employer 401(k) plan, they can be rolled into the Solo 401(k) as long as you did not make any after-tax contributions to those IRAs.

What are my responsibilities as the Solo 401(k) account holder when establishing my new Solo 401(k)?
You have the option to fund the Solo 401(k) plan with annual contributions or transfers from other retirement accounts. You will have the freedom of investing those contributions through the investment vehicle of your choice. You can use any bank or brokerage account of your choice to establish a checking account for your Solo 401(k).

What forms do I have to file with the IRS?
No annual tax reporting is applicable until your assets reach $250,000. At that point, you must file a Form 5500-EZ. Please note, you must always file a Form 1099-R with the IRS should you take a distribution of your plan assets upon plan termination or during participating in the plan. Form 1099-R also applies to in-plan Roth Solo 401(k) conversion of both after-tax and pretax funds.

I have a self-directed Traditional IRA that holds private investment and I want to know if I have to liquidate or can I transfer it to a Solo 401(k) plan?
If the individual is self-employed with no full-time W-2 employees, he or she can set up our Solo 401(k) plan which allows for alternative investments such as private placements, syndicated real estate financing transactions, etc. provided that the investment is a passive investment (e.g. the person is not otherwise involved with the investment provider such as working for the provider nor involved with the underlying real estate in the case of a real estate fund such as using the underlying real estate property).

What is the deadline for me to establish my Solo 401(k) this year?

The 2019 SECURE Act changed deadline for employers to establish a new Solo 401(k) plan is extended from the last day of the tax year until the due date of the year’s tax return (including extensions). This gives employers additional time to allocate a year-end profit sharing (non-elective) contribution to their employees. Change is effective for tax years beginning after December 31, 2019.

Can a sole proprietor open a Solo 401(k) plan?
Yes, a sole proprietorship can also sponsor a Solo 401(k) plan. A sole proprietor files a Schedule C to report the self-employment activity. We would list your name as the self-employed business on the Solo 401(k) plan documents, and your contributions to the Solo 401(k) plan would be based on line 31 of the Schedule C.

Can I sign up for a Solo 401(k) if my business has employees?

You can sign up for a Solo 401(k) only if all of your employees are also owners of the company. With the 2019 SECURE Act, Employers must now allow long-term, part-time employees – defined as employees that complete at least 500 hours of service annually for three consecutive years – to make 401(k) salary deferrals. Prior to the Secure Act, employers could keep out part-time workers that never completed more than 1,000 hours of service in a year. This change is effective for plan years beginning after December 31, 2020. Hours of service before 2021 do not count.

What happens if I get employees in my business?

If a common law, non-owner employee is hired, the Individual 401K plan is no longer an eligible employer plan option. Prior to hiring, the non-owner employee, the employer should consider adopting a Self-Directed Safe Harbor 401K plan or terminating the 401k plan for rolling over to an IRA.

If I am a sole proprietor, will I be able to use my social security number or will I need to obtain an EIN?
No, you would need to obtain a separate EIN (Employer Identification Number) for the Solo 401k from the IRS since a Solo 401(k) is a retirement trust not a business (see above for how to apply for and EIN)

Can my spouse who works for my company and participate in a Solo 401(k)?
If your spouse performs services and receives compensation from the business, they can participate in the same Solo 401(k) plan. The maximum amount they can save also depends on income, age, and salary. A Solo 401(k) is for business owners and their spouses.

Can I piggyback of my spouses’ self-employment income in order to make higher contributions to my Solo 401(k)?
Unlike an IRA where one spouse can contribute to the other spouse’s IRA (spouse IRA) based on the contributing spouse’s earned income if certain rule are satisfied (e.g., both spouses file a joint tax return-Form 1040), the same rule does not apply to a solo 401(k) plan. However, if you both work for the same self-employed business that sponsors the solo 401(k), you can participate in the same solo 401(k) plan and contribute to the solo 401(k) plan based on your respective net self-employment income. Check with your CPA, as you may be able to get creative in allocating earned income if you both work for the same business.

How much can I contribute to my Solo 401(k)?

The owner of a solo 401(k) wears two hats: employer and employee. Contributions can be made to the plan in both capacities. The owner can contribute both:

  • Elective deferrals up to 100% of earned income up to the annual contribution limit of $20,500 in 2022.
  • Employer nonelective contributions of up to 25% as defined by the plan*

Total contributions for individuals under the age of 50 cannot exceed $61,000 for the year 2022. Individuals age 50 and over can also make an additional “catch-up” contribution of $6,500, for a total contribution limit of $67,500 for the year 2022.

What is the catch up contribution for my Solo 401(k)?
If you are age 50 or older, you can contribute an additional $6,500 for tax year 2022.

Is there a required minimum contribution?
No, there is not. You are not required to contribute to the plan every year.

Can you change solo 401k contributions at any time?
Since this account is for self-employed individuals, you can make this decision as the employer. It is smart to consult a CPA or tax advisor to determine what you expect your salary to be for that year.

Is a real estate investor with mostly passive but some active income from flips etc. considered self-employed?
It is unlikely as typically that type of income is reported as investment income (e.g., on Schedule E) where you don’t pay self-employment tax. If you are reporting active self-employment income (eg on Schedule C) with no full time employees, you would be eligible.

Can I borrow from my Solo 401(k)?
Yes. Solo 401k allows for participant loans. You can borrow up to 50% of the account balance from your Solo 401(k) just no more than $50,000 (minimum of $1,000). You can take multiple loans subject to the multiple loan rules.

What is the Solo 401(k) participant loan mount based on?
The solo 401k participant loan is based on the value of the plan assets (i.e. cash plus stock and any other investments in plan such as real estate) and not just cash

We hope this FAQ page has been helpful in answering all of your solo 401(k) questions! If you ever want more information of have additional questions that are not listed here, feel free to call one of our specialists and we’ll be happy to help answer any other questions you may have!

Contact us for opening a Solo 401k