A Solo 401k is a special type of retirement plan. Like all 401ks, it is adopted by an employer to provide tax-advantaged savings benefits to its employees. What makes the Solo 401k different from other employer plans is that it is meant for self-employed individuals who don’t have employees of their own.
The IRS refers to Solo 401ks as One-Participant 401(k) Plans: https://www.irs.gov/retirement-plans/one-participant-401k-plans
Not only are these plans intended for the self-employed with no employees, but they are legally reserved for those who can meet these eligibility requirements. Put another way, you must have some type of self-employment activity and no full-time non-owner W-2 employees of your own to be eligible for a Solo 401k. Now, if you detect a glimmer of flexibility in the previous sentence, you’re right! It takes a specific type of “employee” to make one ineligible for a Solo 401k, though we’ll leave the details of that for our upcoming discussion which focuses on eligibility.
Now that we’ve established the purpose for which a Solo 401k is designed and the person for whom it is intended, let’s look at a few variations of the plans. Not all Solo 401ks are created equal.
Wall Street 401ks – These plans are usually created and administered by brokerage firms who sell Wall Street type products such as stocks and mutual funds. These plans only allow the participant to invest into the brokerage firms’ products. These plans are very restrictive.
Self Directed 401ks – These plans are usually created and administered by self directed custodians who allow for more investment flexibility than the Wall Street versions. They often allow for a wide assortment of asset types. The custodian typically charges asset-based and transaction-based fees and does not allow the participant to directly control their assets.
Checkbook control 401ks – These plans are self-directed, self-trusteed Solo 401ks. The participant does have direct control of their assets with a plan of this type and can invest without paying fees based on their transactions or asset values. This is the type of plan Discount Solo 401k provides.
We’ll dive into more detail about the Solo 401k, the differences between the various types, and the benefits they offer plan participants in subsequent posts.