A Solo 401(k) is an excellent way for self-employed individuals to save for retirement. It offers more flexibility than IRA-based plans.
However, not all brokers offer a solo 401(k). Additionally, choosing the right provider can be challenging for small business owners with limited time.
Most solo 401(k) providers offer a similar product, but there are some differences that you should keep in mind. Ultimately, which one you choose should come down to how hands-on you want to be with your retirement investments and how much time you are willing to dedicate to managing your portfolio. If you want a more hands-on approach, you might prefer the self-directed solo 401(k) option.
On the other hand, if you want to be hands-off, you might prefer a brokerage-based solo 401(k) plan. With these plans, you will generally have more limited investment options but the convenience of having everything in one place.
It would be best to consider how the provider handles service fees. Some companies will charge a flat fee for their setup and ongoing compliance services, while others will base their fees on your total account balance. Look for a company that is transparent about its fees and focuses on building long-term relationships rather than simply trying to make a quick sale.
Finding a company experienced in handling solo 401(k) compliance issues is also essential. They should be able to guide you through the entire process, including ensuring your solo 401(k) meets all of the IRS requirements for controlled groups and other restrictions.
Investing is a long game; the more versatile your investment options, the better. A good Solo 401k provider like Ubiquity will offer a wide selection of individual stocks and ETFs and no-load mutual funds to give you the flexibility to create a well-diversified retirement portfolio.
Many of the best solo 401k providers also offer access to financial calculators, robo-advisors, and banking products like high-yield savings accounts. Depending on your needs, these features could make one provider stand out.
Some providers allow you to add your spouse as a “non-elective deferral participant,” allowing them to contribute up to 25% of their net adjusted self-employed income. It can effectively double your employee contribution limit.
Other providers charge a setup fee for the plan plus a monthly cost to administer it. However, they also offer a gold tier with a few extra perks, such as online document storage and more robust administration.
In addition to fees and investment options, examine a provider’s customer service. You want a company to be there for you if you encounter compliance issues with your solo 401(k) plan. Look for a company with a well-established record in the industry, a strong BBB rating, and a solid website.
Some providers offer additional services that can help make the process easier, including access to financial advisors and robo-advisors. If you’re considering a solo 401(k) and need more time to manage it yourself, consider using a professional advisor or robo-advisor that charges a flat fee to help you with all of your investing needs (including your 401(k))).
Finally, some companies offer different kinds of solo 401(k) plans – for example, they might have different options for Roth and Traditional accounts. If you plan to hire employees in the future, a solo 401(k) may not be your best option – because it would have to convert to a multi-employee plan, and ERISA rules will apply.
A SEP-IRA might be a better choice if that’s the case because it allows you to contribute more than a 401(k) without the complex rules and administration. However, a SEP-IRA also requires more upfront paperwork and ongoing compliance. So, if you can manage the paperwork yourself, a 401(k) might be a better fit for you.
A solo 401(k) plan naturally comes with much more complexity than an off-the-shelf option. In addition to the plan document and adoption agreement, there are duties the provider is responsible for (like opening accounts, keeping track of contributions and distributions, and preparing Form 5500-EZ annually). For financial planners who wish to offer solo 401(k) services to their clients, it may be worth finding a provider that offers these additional services if they want to make life a little easier.
Another factor to consider is whether the provider has an edge in one area, like offering a robo-advisor or supporting alternative assets. While some providers will limit the types of assets you can invest in, others have a robust list that includes everything from real estate to hard assets like gold and silver.