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Solo 401k is a Retirement Plan Alternative for the Self-Employed

By Dmitriy Fomichenko, President and Founder of Sense Financial


"Taking complete ownership of your outcomes by holding no one but yourself responsible for them is the most powerful thing you can do to drive your success." ~ Gary W. Keller

According to a Pew Research Center analysis from the U.S. Central Bureau, as many as 44 million jobs in the U.S. in 2014 were created by self-employed professionals, including the workers employed by them, representing 30% of the 146 million American workers.

Isn't that a huge number? Are you a part of that workforce or plan to be one shortly? Self-employment is fulfilling in itself, and who wouldn't just want to work for himself!

All great so far, but here's something that you may want to look at:

According to a Wall Street Journal blog post, an average self-employed professional with annual income of $100,000 would receive a tax bill of $30,582 against a tax bill of $25,869 received by his traditionally employed counterpart.

A TD Ameritrade survey revealed that 28% of the self-employed professionals do not save anything at all for retirement against 10% of their traditionally employed counterparts.

Do you fall into any of these two categories? Even if you have started saving for retirement, you may still be paying comparatively higher taxes. For those of you with a retirement plan, don't you feel that the traditional retirement solutions have really low contribution limits and limited investment options?

One Solution: Solo 401k Self-directed Retirement Plan

The TD Ameritrade survey further reveals that 47% of the self-employed professionals use traditional savings account for retirement savings, with traditional IRAs and Roth IRAs topping the list at 33% and 32%, respectively.

What is a Solo 401k?

A Solo 401k is a qualified retirement plan for self-employed professionals, owner-only businesses, and individuals with part-time self-employment activity.


Self-employed professionals and small business owners are eligible for a Solo 401k retirement plan. If you are working for another employer but have a part-time self-employment activity that generates income, you are eligible for a Solo 401k plan. Such self employment activity or business should not have any full time employee, except for the owner and their spouse. Some exceptions to this rule include:

  1. Employees that work less than 1,000 hours per year
  2. Employees under the age of 21 years
  3. Non-resident alien employees
  4. Union employees

Contribution Limits

You can contribute up to $59,000 in a Solo 401k account for the financial year 2015 and 2016. The IRS allows annual contributions of up to $53,000, including elective deferrals of up to $18,000 and 25% of annual business income. For professionals above 50 years of age, there is an additional catch-up contribution of $6,000.

Case I: Steve, 44 years old, retired from his full-time cardiologist position to become an independent cardiology consultant last year. His net income from consulting was $120,000, making him liable to self-employment taxes. In order to save taxes, Steve opted for a Solo 401k retirement plan. He was able to contribute $18,000 in elective deferrals along with profit-sharing contributions of $30,000, allowing him to reduce his taxable income by $48,000.

Case II: Linda, 51 years old, is an audiologist in Greenville and contributes $18,000 annually to her employer's 401k plan along with a catch-up contribution of $6,000. As a part-time endeavor, she offers consulting services to other hospitals, which helped her generate $30,000 in self-employment income in 2015. Even after exhausting her employee deferral contributions of $24,000 for 2015, she was able to contribute up to 25% of her self-employment income, $7,500, as a part of her employer contributions in Solo 401k, cutting her total taxable income by $31,500 in 2015.

What are the investment options available in a Self-Directed Solo 401k plan?

The stock market crash in 2008 wiped out more than $2.7 trillion from retirement accounts during the last two quarters of the year, affecting millions of retirees in the process. It forced average investors to seek alternative investment options, and catalyzed the entire alternative investment industry.

Unlike traditional retirement plans, self directed Solo 401k plans are famous for offering creative investment options, allowing you to explore different investment tools. Some of the potential investment vehicles include:

Regular investment options: Along with all the investment options available under Solo 401k plans, you can invest in regular stocks, bonds, mutual funds, and similar investments available in the market.

Real Estate: If you didn't know yet, the IRS allows real estate investing through a Solo 401k plan. Traditional custodians may put restrictions on investment options. However, with a self-directed Solo 401k plan, you can purchase a commercial property, rental property, raw land, farm, and pretty much any sort of real estate under your plan.

Tax Liens: Active investments, such as real estate, demand expertise as well as time, and if you're already occupied with your primary job/business, taking passive investing route could serve you well. You can purchase tax liens with your Solo 401k portfolio, although make sure that you understand how they work and an expert opinion might help you in taking the right decision.

Tax Deeds: Depending upon the state you live in, a tax deed is another passive investment option to consider. In simple words, the government holds the authority to sell a property in order to receive delinquent taxes, and in the process creates a deed against the house. Much like tax liens, you may want to consult an expert before investing in a tax deed.

Mortgage Notes: If you are into passive income generation, investing in mortgage notes is an appealing option. You can purchase mortgage notes through your Solo 401k plan and add an uninterrupted income stream to your portfolio. The key is to redirect mortgage payments to your Solo 401k account, and any note maintenance cost should go from your retirement account only.

Precious Metals: If you're troubled with the stock market disruptions, investing in precious metals may just work for you. The IRS allows purchasing specific precious metal coins/bullions, provided you store them at certified financial/government institutions.

Private Lending: With Solo 401k, you can explore startup funding and private lending industries, although you should not benefit from its operations, directly or indirectly. The IRS allows purchasing stake in a startup or private company and private lending for the benefit of the retirement plan.

Dmitriy Fomichenko is President and Founder of Sense Financial, a leading provider of retirement accounts with "Checkbook Control": the Solo 401k and the Checkbook IRA. To learn more about the Solo 401k plan, please visit sensefinancial.com or email us at info@sensefinancial.com.

More information on Solo 401k plans can be found by clicking here.


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