[Guide] Solo 401(k) User Guide

What is a Solo 401(k)?

A Solo 401(k) is a single-member 401(k) plan for self-employed individuals or business owners with no full-time employees. These accounts are great for sole proprietors or independent consultants that might otherwise not be able to participate in the 401(k) plan of a more traditional employer. The Solo 401(k) allows folks who would otherwise not be able to participate in an employer’s 401(k) plan the ability to make contributions, take advantage of tax-free growth and make their own investment decisions.

Who qualifies for a Solo 401(k)?

In order to qualify for a Solo 401(k), you must have self-employment income. This can range from consulting fees, a small business, to Uber driving, or anything in between, but it must be earned income. For example, having a rental unit that you get paid rent on does not qualify as earned income.

For a lot of people, their qualifying income is not their main source of income, and though you can only contribute up to either the amount you earned or the contribution limits, you are able to roll over an unlimited amount from other sources.

Common business entities tied to a Solo 401(k) are a Sole Proprietship, LLC, C-Corp, or S-Corp. You must tie your Solo 401(k) to one of these, and one only if you have multiple businesses. If you don't have an entity, a Sole Proprietorship is usually the easiest to start in most states, but talking to a CPA can make sure you are tax efficient in your business setup and planning for when you contribute to your Solo 401(k). No matter what entity you use, you must have a salary greater than $0 a year.

It is important to recognize what is and what is not self-employment income. Rental income, for example, is not an example of self-employment income. S-Corp distributions are pass-through dividends and not self-employment income. If you have any questions about qualifying for a Solo 401(k), our team is always available to answer your questions. Rocket Dollar cannot set up business entities, only Solo 401(k) retirement plans tied to them.

If you are married, your spouse can participate in the same Solo 401(k) as you do, or you can in their Solo 401(k) as long as you are both paid employees of the same business.

If you have full-time W2 employees other than you or your spouse, the Solo 401(k) is not right for you. Full-time employees are eligible for similar retirement benefits as you which cannot be provided in a Solo 401(k). You might have to explore a SEP IRA that Rocket Dollar offers or a Corporate 401(k) plan.

How is a Solo 401(k) structured?

A Solo 401(k) is created with plan documents created for you via a provider such as Rocket Dollar who will draft the proper paperwork to establish your Solo 401(k). After the plan documents are established, a bank account will be opened for the plan, where funds will be rolled into or where you will make contributions. From that same account, you will send and receive money for investments.

Solo 401(k) plans allow for both Traditional and ROTH “buckets” under the same set of plan documents. It is important to have two separate Trust Bank Accounts for Traditional and Roth designations.

How do I make an investment with a Solo 401(k)?

Making an investment out of your Solo 401(k) is similar to making an investment out of a regular cash account, with some key differences, mostly centered around the titling of the investment. It is critically important that investments are titled correctly, and not in your personal name, but rather the name of your Solo 401(k).

Below are a few examples of how you would label an investment depending on how your plan is set up:

For Sole-Proprietorship with a Rocket Dollar Solo 401(k)

The plan will be named as “[YOUR NAME] 401k PSP”

For example, John Smith who owns a sole-proprietorship will start a Solo 401k at Rocket Dollar titled “John Smith 401k PSP”

When you sign, it should be “Firstname Lastname, Trustee”

For LLC and Corporations with a Rocket Dollar Solo 401(k)

The plan will be named as “[BUSINESS NAME] 401k PSP”

For example, John Smith who owns a business called Texas Oil Consultants will start a Solo 401k at Rocket Dollar titled “Texas Oil Consultants 401k PSP”

When you sign, it should be “Firstname Lastname, Trustee”

If I'm signing up for an investment platform account for my Solo 401K, what do I pick?

You will notate your plan as a trust during signup. Remember to use your correct plan name. You might have to contact the website for the correct signup instructions if only personal signup is readily available.

How do I make contributions to a Solo 401(k)?

There are three types of contributions to your Self-Directed Solo 401(k):

Traditional (employee salary deferral, pre-tax)
Roth (after-tax)
Employer contribution or profit-sharing. You can choose one calculation period per taxable year. These are pre-tax deferrals only.

The maximum employee salary deferral is $20,500 for 2022 and $22,500 for 2023. You can contribute 100% of your income up to the $22,500 limit. Catch-up contributions of $7,500 are possible for persons 50 and over. The IRS calls these “elective deferrals” because you are choosing to make them as an employee.

You have two contribution limits and “buckets” to hit the $66,000 limit.

Since profit sharing and employer contributions can only be pre-tax, it might make sense to contribute to the Roth bucket for your elective/personal contribution and have the employer/business contribution cover your traditional contributions.

Contribution Limits	2021	2022	2023
Traditional deferral or Roth personal contribution	$19,500	$20,500	$22,500
Profit-sharing/Employer Contribution	$38,500	$41,500	$43,500

Can I contribute to both a workplace plan and a Solo 401(k) for my self-employed business at Rocket Dollar?

Yes! You just have to make sure you don't go over the overall contribution limits. You must add up your workplace contributions along with your Solo K contributions so that you don't overclaim any tax-advantaged contributions on your taxes.

If you have an employer match, be sure not to pass up that match in the workplace retirement plan, especially if it is a generous match. An employer match is one of the easiest and surefire ways to accumulate more capital in your retirement accounts.

Then, after you have taken full advantage of the employer match, you can contribute the rest underneath your Solo 401(k) to invest it however you would like to. Remember, your solo K contributions can come from ONLY your Self-Employed Income.

We like this calculator from AARP to calculate your contribution limit.

Roles & Responsibilities

Account Holder

The individual account holder serves as the trustee of the plan and is ultimately responsible for everything related to the plan. From calculating the proper contributions to investment decisions, this person is responsible for the plan.

Rocket Dollar

Rocket Dollar will assist the account holder with any questions regarding their plan, and help guide them through the process of setting up, managing, and reporting on their plan. We are a partner with the account holder throughout the life of their plan, and our monthly fee covers any questions or concerns that might arise. We also ensure that proper reporting is completed depending on the needs of each account holder.

Frequently Asked Questions

Are there any transaction fees associated with a Solo 401(k)?

The only transaction fees associated with your account are wire transfer fees. With a Gold account, 2 of your wire fees are covered each year.

Does Rocket Dollar set up the bank account associated with a Solo 401(k)?

Yes, our team will set up a trust account at our partner bank, who specializes in self-directed retirement accounts.

Does Rocket Dollar assist in the transfer/rollover of funds to a new Solo 401(k)?

Yes, our team will handle all incoming funds to your accounts. Some custodians will require you to personally request a transfer, but our team will guide you through the process.

Guide

Solo 401(k) User Guide

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