A solo 401K is a single-participant, or individual, 401k that is designed for self-employed workers. It’s created specifically for business owners who do not have employees.
One of the drawbacks to being self-employed is the lack of an employer-sponsored retirement plan, which has major perks like contributions made by you and your employer. That’s where a solo 401k comes in.
You can make contributions to your solo 401k as both the employer and employee, which allows you to maximize your contributions and make deductions on your tax return.
It’s a solid retirement plan choice for self-employed workers, but what is the best solo 401k provider?
5 Best Solo 401k Providers – Comparing the Top Options
With such low fees and a wide range of investment options, Fidelity has one of the best solo 401k plans available right now. It’s a great choice for investors who are focused on keeping their fees low.
Fidelity has no opening costs, closing costs, or annual fees associated with their solo 401k plans. There are $0 commissions on U.S. stock, ETFs, and options trades (but there is a $0.65 contract fee for options).
Fidelity has a wide range of investment options, including stocks (and fractional shares), ETFs, mutual funds, options, bonds, and CDs. Fidelity has four zero expense ratio mutual funds, and Fidelity’s own index funds have lower fees than some of Vanguard’s – one of its low-cost competitors.
I’m going to explain how solo 401k contributions work for 2023 further down in this article, but the biggest downside to Fidelity is that you can’t make Roth contributions (after-tax dollars that are better if you expect to earn more in retirement). You also can’t take 401k loans, but from a cost standpoint, Fidelity is definitely worth considering.
2. Charles Schwab
Charles Schwab is another great, low-cost option for your solo 401k. Schwab calls it an individual 401k, and there are no opening or maintenance fees. There’s also no commission trades on stocks and ETFs, and there are more than 4,000 no-load, no-transaction-fee mutual funds.
You can use Schwab Intelligent Portfolios, its free robo-advisor, if you don’t want to self-direct your deposits. The Schwab Intelligent Portfolio can help you determine your risk tolerance and align your investments to match. There’s a $5,000 minimum balance to use this service.
Schwab is known for great customer service via phone, but if you call in for automated phone trades, there is a $5 fee. And broker-assisted trades are $25. However, Schwab has an intuitive platform that’s very easy-to-use. I hold my personal investments at Schwab, and I’ve never had any issues using their site.
Like Fidelity, Schwab doesn’t offer Roth contributions or 401k loans.
If you want to focus on mutual funds, Vanguard has one of the best solo 401k plans for mutual fund investors.
Mutual funds are Vanguard’s bread and butter. They have 119 of their own mutual funds, all with a much lower than average expense ratio (expense ratio is what you’re charged for owning a fund). Vanguard’s average mutual fund expense ratio is 0.10% compared to an industry average of 0.63%.
Vanguard has even lower average expense ratios on their ETFs – 0.06% compared to the industry average of 0.25%,
However, the only investments eligible for a Vanguard solo 401k are Vanguard mutual funds. Also worth noting that Vanguard charges $20 a year for each Vanguard fund held in your account. If you’re investing in four funds, that’s $80/year. Vanguard waives those fees once your account surpasses $50,000.
On the flip side, Vanguard does allow Roth (after-tax) contributions. Still no 401k loans, though.
4. TD Ameritrade
Before I tell you too much about the TD Ameritrade solo 401k, you should be aware that Charles Schwab recently acquired TD Ameritrade, and Ameritrade accounts will eventually become Schwab accounts.
TD Ameritrade has an advanced platform that’s good for active investors, making it the best solo 401k if you like to get hands-on with your investments.
One of TD Ameritrade’s key features is its Thinkorswim tool. It has customizable tools that let you create watch lists, run trading simulations, and more. Thinkorswim will stick around once TD Ameritrade accounts are rolled over to Schwab accounts.
TD Ameritrade has a couple of features missing from these other best solo 401k providers, specifically both traditional and Roth contributions and 401k loans.
This is still a low-cost option, with no setup fees or annual fees. There are $0 commissions on stock, ETFs, and options trades.
Clearly, there’s a lot to like about TD Ameritrade, but it could be overwhelming for new investors.
Like the last brokerage, E-Trade has gone through recent changes – it became a subsidiary of industry giant Morgan Stanley – but so far it looks like E-Trade’s 401k accounts will retain all of the features I’m about to explain.
E-Trade’s features make it one of the most versatile options right now. That includes both Roth and traditional contributions, and you can also take a 401k loan at E-Trade.
E-Trade doesn’t charge fees to open an account, there are $0 commissions, and E-Trade supports over 4,500 mutual funds on its no-load, no-transaction-fee list. You can trade options, futures, fixed-income bonds, and CDs.
Why a solo 401k over a SEP IRA?
SEP IRAs are another kind of tax-advantaged retirement account specifically for self-employed people. The idea is that it creates an easy option for small business owners who want to establish a retirement account.
Those accounts were really popular until legislation created the solo 401k, which gives business owners even more benefits. The biggest perk is that a solo 401k allows both employee and employer contributions.
So as the business owner, you can essentially contribute twice. SEP IRAs are funded through employer contributions alone.
Here are a few more reasons why more people are choosing a solo 401k over a SEP IRA:
- You can make catch-up contributions. SEP IRAs do not allow catch-up contributions for participants who are 50 and over. Catch-up contributions are an additional $6,500 for 2021.
- They allow employee deferrals. Like I was saying before, contributions can be made as an employee and as a profit-sharing contribution (the employer end). This benefit allows the business owner to contribute up to $19,500 in 2021 even if the business loses money in that year.
- You can make both Roth and traditional contributions. Roth contributions are made with after-tax dollars and good if you expect to make more closer to your retirement date. Traditional contributions are taxed in retirement. SEP IRAs only allow traditional contributions.
- You can borrow from your 401k. Unlike a SEP IRA, participants can take out a loan that’s equal to the lesser of 50% of your 401k balance or $50,000.
- Your spouse can make contributions. If your spouse pulls in income from your business, then they can also make contributions.
The benefit of a SEP IRA is that you can make contributions to your employees’ retirement plans. You can learn more about SEP IRAs in 5 Best SEP IRA Providers of 2023.
What to look for in a solo 401k?
Keeping those benefits in mind, I highly recommend looking for a brokerage that lets you make both Roth and traditional contributions. You should also see if the provider lets you do rollovers into the plan and rollovers out of the plan. If for some reason you want/need to move your account, you want that option.
Look at what kinds of investments are allowed in your account. More investment options mean you have more control over your retirement plan and the potential for a better long-term investment.
Pay attention to the costs associated with each kind of account. You shouldn’t have to pay to open a solo 401k, bottom line. From there, each brokerage has some nuance regarding fees. Consider how each will affect your investment.
And even though you may not feel like you will ever take out a 401k loan, that’s a feature you may want access to at some point in your life.
M$M tip: Keep track of what’s in your 401k and the rest of investment accounts with Personal Capital. It’s free personal finance software that has robust tools to analyze the fees of your 401k, check your asset allocation, run an investment checkup, and run retirement planning strategies.
How to open a solo 401k?
You will need an Employer Identification Number (EIN) to open your solo 401k. You will need to fill out a short account application and complete a plan adoption agreement, which defines the specific features of your plan.
Most brokerages have the paperwork available on their sites. Don’t hesitate to contact the customer helpline if you have questions when you’re filling everything out.
As soon as the paperwork is filled out, you can start making contributions. You can self-direct your investments or use the robo-advisor Blooom to manage your 401k if your provider doesn’t have a robo-advisor feature.
Plans with a balance of $250,000 or more may require additional paperwork– the IRS currently requires an annual report on Form 5500-SF if you reach that threshold.
How much can I contribute to my solo 401k in 2020?
The solo 401k contribution limit for 2021 is up to $58,000. If you are 50 or older, you can make an additional catch-up contribution of $6,500.
However, if you are side hustling on the side of your day job and making 401k contributions through your employer, the contribution limit applies across all plans, not individual ones. That means if you contribute $5,000 to your work’s 401k, that’s $5,000 less you can contribute to your solo 401k.
There are also limits within the total $58,000 contribution limit, and it will help to remember that you are acting as both employee and employer with your solo 401k. Here are the additional limits:
- As the employee: Employees can contribute up to $19,500 in 2020 or 100% of compensation, whichever is less. If you’re 50 or older, your catch-up contribution of $6,500 can be added here.
- As the employer: Acting as the employer, you can make an additional profit-sharing contribution of up to 25% of your compensation (net self-employment income). The compensation limit here you can use to factor your contribution is $290,000 in 2023.
You fill both of those roles: employer and employee, which is why there’s a much higher contribution limit.
Remember, your spouse can also contribute to your solo 401k if they derive an income from your business. This is up to the $19,500 employee limit (plus, the $6,500 catch-up contribution if they’re at least 50 years old). Then as the employer, you can make profit-sharing contributions for them.
Who has the best solo 401k?
All of the providers on this list are worth checking out if you are self-employed and want to invest for retirement. That being said, here’s a quick overview:
- Best for low fees: Fidelity
- Best for mutual funds: Vanguard
- Best robo advisor feature: Charles Schwab
- Best for active investors: TD Ameritrade
- Best for features: E-Trade
Personally, fees and the overall cost is one of the biggest factors I would consider. Fees can quickly add up if you are not paying attention. This can drastically eat into your retirement savings.
Lower fees = more to invest. It’s that simple.
From there, I’d look at who has the most investment options, followed by being able to make both traditional and Roth contributions, then being able to take out a 401k loan last of all.
Really consider your priorities, and you can make the right choice from there.
Yes, you can self-direct your solo 401k! You’ll most likely have access to far more investment options than you would have if you were investing in a traditional 401k through your employer.
Self-directing gives you far more choice, but you need to be ready to get hands-on with your investments. Fortunately, at least one of these brokerages have robo-advisor options, like Schwab. You can also use Blooom to manage your investments for you.
One of the major benefits of a solo 401k is that you can make traditional or Roth contributions.
- Traditional contributions are tax-deferred and taxed as income when you take distributions upon retirement.
- Roth contributions have taxes paid upfront, so your contributions grow tax-free over time. Your retirement contributions are not taxed.
Traditional contributions are best if you think your income will be higher now than in retirement, but Roth is better if you expect your income to be higher in retirement.