Solo 401(k) 'one of the best-kept secrets' for the self-employed

Share with others:

Print Email Read Later

After graduating in May from the Tepper School of Business at Carnegie Mellon University, 28-year-old Stephen Morse established his own financial advising firm in Scott.

Being his own boss, Mr. Morse has no access to the traditional company 401(k) plans offered by many corporations to their employees, but he plans to take advantage of a little-known retirement saving option for self-employed individuals called a Solo 401(k).

“This allows me to benefit from the same tax-deferred growth and tax-deductible contributions as anyone with access to a corporate 401(k) program,” Mr. Morse said. “I plan to max out my contributions every year.”

Driven by economic necessity or a desire to take more control of their own careers, more people are opting to work for themselves as freelancers and independent contractors.

The trend shows no signs of slowing down, with asset rental and task-sharing websites like Uber, Airbnb and TaskRabbit further opening the floodgates to new ways of working.

But self-employed individuals often face challenges saving for retirement without the structure of a group retirement program like a company 401(k).

“The Solo 401(k) is one of the best-kept secrets available to self-employed professionals,” said Scott Puritz, co-founder of Palo Alto, Calif.-based retirement investment advisory firm Rebalance IRA. “It’s not talked about enough and it’s relatively new. But for some people, this is the best solution that really evens the retirement playing field for everyone who doesn’t work for a major corporation.”

As of March, there was $4.3 trillion total assets invested in 401(k) plans, according to the Washington, D.C.-based Investment Company Institute. But data on how many people are using Solo 401(k) plans are not available.

Solo 401(k) plans were created in 2001 by an act of Congress. They can be used by self-employed individuals who have no full-time employees and by people who are the sole owner-employee of a corporation. The spouse of the owner also is eligible.

Owners of Solo 401(k) plans have all the options available to them that are offered to company participants, such as tax-deferred growth and the ability to borrow up to $50,000 from the account.

By making contributions in the role of employee and employer, those with Solo 401(k) plans can end up with more than they would have with other retirement investment vehicles available to small business owners.

“Someone with a modest income can put away a lot more money with a Solo 401(k),” said Regi Armstrong, president of Armstrong Wealth Management Group in Florence, S.C.

Mr. Armstrong said a business owner earning $50,000 a year can only contribute 20 percent of his income, or $10,000 in this example, a year to an SEP-IRA, or Simplified Employee Pension. The same business owner would be limited to a $13,500 contribution to a Simple IRA based on 2014 contribution limits.

But he could contribute a maximum $27,500 to a Solo 401(k).

The rules allow the business owner to contribute up to $17,500 as an employee, and another $10,000 for employer contributions as the owner of the company.

Business owners can set up the accounts at any discount brokerage, such as TD Ameritrade or Scottrade. They can then turn the account over to a financial adviser of their choosing to manage and administer.

Nathan Boxx, an associate financial consultant at Fort Pitt Capital Group in Green Tree, said his company has been managing Solo 401(k) plans for small business clients for several years. The clients who use them include freelancers, consultants and independent contractors.

“We can’t do individual 401(k)s for mom and pop store owners because they usually have other full-time employees who would have to be a part of the plan,” Mr. Boxx said. “The Solo 401(k) also has the advantage of the owner being able to take out loans, which is an option not available with SEP-IRAs or Simple IRAs.

“Another nice benefit of the Solo 401(k) is the option of setting it up as a Roth account, which reverses the tax flow of the traditional 401(k). With a Roth 401(k), the account owner makes contributions on an after-tax basis, but withdrawals come out tax-free.”

Although the Solo 401(k) is nearly 14 years old, Mitch Tuchman, managing director of Rebalance IRA, said every time he mentions the option to a client, they have never heard of it.

His company has set up such plans for doctors who do contract work on the side, graphic designers, self-employed engineers and real estate agents.

“These are perfect for Realtors,” he said. “It’s a better way to use the government to help you fund retirement. It relegates the [Simplified Employee Pension] to dinosaur status.”

Tim Grant: or 412-263-1591.

Tim Grant: or 412-263-1591.

Join the conversation:

Commenting policy | How to report abuse
To report inappropriate comments, abuse and/or repeat offenders, please send an email to and include a link to the article and a copy of the comment. Your report will be reviewed in a timely manner. Thank you.
Commenting policy | How to report abuse


Create a free PG account.
Already have an account?