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Investor's Perspective: When to Use a Solo (self-directed) 401k Plan

To ensure a thorough understanding of the self-directed 401k plan, we must first clearly define the purpose of a traditional 401k plan. The primary function of a traditional 401k plan is to implement an employer-sponsored plan that enables employees to allocate a portion of their income to an investment account with the objective of generating income during retirement.

The main difference between a traditional vs. a Solo 401k plan is that the Solo version is specifically designed for self-employed individuals.  

Is a Solo 401k plan for you?

The Solo 401k plan was created to give self-employed individuals the option to participate in a tax-deferred retirement account that has the same benefits of an employer-sponsored traditional 401k plan. Your spouse can also participate in a 401k plan if you are self-employed and your business actually generates revenue. However, if you have employees that work more than 1,000 hours per year, you will NOT qualify for a Solo 401k plan.  

Things you should know about a Solo 401k Plan

Similar to a traditional 401k plan, the primary function of a Solo 401k plan is predicated on tax benefits. In a tax-deferred Solo 401k plan your contributions will not be taxed until you withdraw the funds during your retirement years.

Or you can elect for a Roth Solo 401k plan which means that your contributions will be taxed upfront but you can withdraw your funds tax-free during retirement. Either way, you will not pay taxes on capital gains during the growth of your Solo 401k plan.  

A critical difference between a Solo 401k plan vs. an employer-sponsored 401k plan is that you can make contributions from your personal and business income with a Solo 401k plan. Also, note that a Solo 401k plan must be established before Dec 31st if you want to make contributions for that year. 


A Solo 401k plan should only be examined if you have a self-employed business that actually generates revenue with or without employees that work no more than 1,000 hours per year. 

I will advise against establishing a Solo 401k plan if you are planning on hiring full-time employees at some point, as there are other retirement planning options that you can explore if this is the case. However, if you are planning to remain a solo-practitioner in your self-employed business, a Solo 401k plan can be an excellent retirement planning option for you. 

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Disclaimer: Hudson Wealth Management, LLC (HWM) is a FINRA registered investment adviser firm. Investing in securities involves risks, and there is always the potential of losing money when you invest in securities. Before investing, consider your investment objectives and HWM's fee schedule. The information provided herein is for illustrative purposes only and does not constitute personalized investment advice, recommendations or solicitations to hold, buy or sell any investment or security of any kind. All images and return figures shown are for illustrative purposes only and are not actual customer or model returns. Past performance does not guarantee future results.

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