Don't Forfeit Your Solo 401(k)

A solo 401(k) plan is an excellent way for sole proprietors to pack away retirement funds. In 2024, you can contribute up to $23,000 ($30,500 if you’re 50 or older) in pre-tax dollars. As the employer, you can also make matching contributions to your account.

SOLO 401(K) PLAN ADVANTAGES

Administrative simplicity is a major plus with Solo 401(k) plans. Nondiscrimination testing is not necessary and there are minimal filing requirements. Additionally, there are no “fidelity bonds” or traditionally required ERISA Title 1 notices for employees required.

THERE'S A CATCH

Before you choose a Solo 401(k), beware that you cannot have any employees (other than your spouse), so if you have employees or want to hire employees in the future, this plan is not for you. That's because Solo 401(k)s automatically lose their qualified plan status as soon as a common-law employee meets the plan’s participation requirements.

If you have a Solo 401(k) and find you need to hire help, consult your professional advisor about amending plan documents, before they become eligible to participate. Otherwise, you risk disqualification, penalties, and contribution refunds. If you have two plans, remember elective deferral limits are by person, not by plan.