Pros and Cons of a Solo 401K Plan

If you own a small family business, or are self-employed you’re not limited from investing in your retirement, and saving for the future. Many people select to plan for relaxing later in life with the security of retirement benefits through solo 401K plans.

What is a Solo 401K Plan?

401kA solo 401K plan, also known as an individual 401K, uni-k, or solo k is a retirement plan that is much like a traditional 401K offered by large companies, but is specific to people who are self-employed.

Individual 401k plans come in two versions: Traditional and Roth.

Traditional

In a traditional plan, you can store money away pre-tax, and will be taxed when you choose to withdraw funds.

Roth

With a Roth plan, you can put money away post-tax, and do not have to pay any taxes upon withdrawl.

You don’t have to choose one version or the other, as you can split your contributions over multiple accounts. In both versions of the individual 401K plan, you can borrow funds from the balance you’ve saved.

Who is a Solo 401K Plan For?

The solo k is designed solely for self-employed Americans who operate their business as the sole proprietor. Spouses may also be eligible to contribute if they participate in generating earnings for the business.

What are the Pros?

If you are self-employed and looking for a valuable way to save and contribute to your retirement, the uni-k has many advantages, including:

  • Various contribution options
  • Flexibility in how much money is contributed each year
  • Tax benefits and deductions
  • Ability to make contributions into the following year

What are the Cons?

For all the benefits and pros an individual 401K plan has to offer, there are also some disadvantages to this kind of retirement saving strategy.

  • The solo 401K is more complicated to set up, and you’ll need the help of professional to get it set up properly
  • This type of plan is a bit more expensive to set up and maintain
  • There are reporting requirements contingent upon the amount of money in the account

What are the other Options For Small Business Owners?

If your small business is gaining employees, and you wish to extend retirement benefits, the below options are also worth looking into and considering.

  • Simple IRA
  • SEP IRA
  • Defined Benefit Plans

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