Solo 401(k) FAQs

What is a “Self-Directed” 401(k)?

A self-directed 401(k) puts you in the driver’s seat for any investment activities you want to pursue. Employers may place certain stipulations on (or outright disallow) transferring or rolling your 401(k)-held cash or assets. Others may not allow alternative assets. Others still may not allow you to choose between non-alternative investments. With a self-directed 401(k), you may transfer, roll, and invest as you see fit as long as your plan document is written to allow alternative assets.

Ready to learn more about self-directed investments? Click here to download our helpful Investing Guides.

What is a “Solo” 401(k)?

One key difference lies in the fact that Solo 401(k) holders are self-employed individuals with no other employees. As such, the plan holder him or herself would be the only person who would make 401(k) contributions. In the employer-sponsored model, you may defer a portion of your income to your 401(k) and your employer could match. You would occupy both roles with a Solo 401(k) in that you would make employee and employer contributions into your one plan.

Solo 401(k) holders can also act as trustees of their accounts. This gives them a degree of flexibility not available to employer-sponsored 401(k) holders. Trustees can adopt a more hands-on approach when reviewing and obtaining investments on behalf of their plans. However, it’s important to remember that IRS regulations surrounding prohibited transactions will always apply regardless of your investment approach or abilities afforded through being a Solo 401(k) trustee.

Can I make higher contributions?

There are no differences between Solo 401(k)s and their employer-sponsored counterparts from a tax benefit standpoint, and annual contribution limits (employee and employer) and distribution parameters are the same as well. Annual Solo 401(k) contributions can be nearly 10 times higher than those of Traditional or Roth IRAs.

What’s the difference between a SEP IRA and Solo 401(k)?

Both account types allow self-employed people to make higher annual contributions. However, each offers nuances that may appeal to certain business owners more than others:

  • Annual SEP IRA contribution limits can be higher, but that generally depends on compensation and can vary between individuals. Solo 401(k) holders can enjoy relatively consistent limits (barring major changes to their compensation) and plan their contributions accordingly.
  • As previously discussed, Solo 401(k) holders are the only employees of their businesses. SEP IRA holders can manage their businesses themselves as well, but they can also take on employees if they so choose.
  • You cannot name yourself as trustee of a SEP IRA, though you may open and fund an LLC within your IRA to garner checkbook control.

How can NDTCO help me with a Solo 401(k)?

When you open a self-directed Solo 401(k) with New Direction Trust Company, you have the opportunity to take advantage of higher 401(k) contribution limits while utilizing the alternative investment strategy of your choosing. At NDTCO, we can assist with your Solo 401(k) in the following ways:

  • We can lease a plan document to you – NDTCO can provide a Solo 401(k) plan document if you don’t already have one. You would conduct all recordkeeping activities under this model.
  • We can provide recordkeeping services for an existing plan document – If you already have a Solo 401(k) plan document but would prefer not to handle the recordkeeping, NDTCO would be happy to handle it for you.
  • We can do both! – NDTCO offers a full-service option for Solo 401(k)s, meaning we’ll lease a plan document to you and carry out all recordkeeping for the account. This doesn’t mean you’ll give up control of your investments. You, as the self-directed Solo 401(k) holder, would still have the power to decide which assets will build your portfolio.

For more information about Solo 401(k)s, please don’t hesitate to give us a call at 877-742-1270 or send us a message through the Client Portal.

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