How to Set Up, Maintain, and Maximize Your Solo 401(k)

When we're talking about a solo K, you can go buy stocks, bonds and mutual funds. I'm not against that. But that's not all that you can invest in. Like when you have a self directed solo 401k, you can buy real estate, you can invest in a private company, you can buy crypto, you can buy precious metals, you can invest in a private fund. We're not saying you have to go to Wall street and buy more stocks, bonds, annuities or mutual funds.

It's all about the rate of return. Investing in what you know and investing in something else that could get you two or three times the return you would get over here in just a simple mutual fund. Not that they're bad, but wouldn't you like to do both? And you can win.

Welcome everyone to the Main Street Business Podcast. This is Matt Sorenson, joined by Mark J. Kohler. And we are getting into part two of the solo 401k. How to set up, maintain and maximize

your solo K. Yeah, some may say Fast and The Furious Part 2 was one of their better ones. I think this could be better than part one. Not sure.

You know, maybe Back to the Future two. I mean, I don't know. I don't. Fast and Furious, Is that your lane?

No, I'm, I'm, I don't know. Have you seen it Parts. Well, we better get into this before I'm gonna, you know, I just, you know, I don't know how many versions of Fast and the Furious are. That's the big joke. So maybe that's.

That's right.

All right, well everybody, please, if you haven't listened to part one, I would recommend you go back and catch that before we proceed. The reason why is a lot of the questions you may have answered of why they're so great and I think we hit our top 10 or whatever it was of just awesome reasons for a solo 401k and how they function is in part one. Now, Matt, what's our lineup today? Well, here's what we're going to do.

Yeah. Here's the agenda, so to speak. More to how do you qualify for the Solo 401k? It's not for everyone, but for who it's for. It's the frickin best retirement account to set up. So I go over that. How do you set this up? What are the documents involved? What's legally required to get this set up and operating? How do I get the money in and contribute? Roll over money, get new money in? That's really the Maximizing part here and then we'll talk about investing it and then maintaining it. There are some requirements and things you got to do to keep it up to date for IRS standards. So that's our agenda. We're going to rip through it, give you everything you need to know on this. And please know we've got a team of lawyers at kqs, lawyers that sets these up every day, advises clients. Our team at directed IRA can help handle the account. So we've got the solutions for you when you want to go execute on this. But let me hit. You want to hit. Go ahead, Mark.

Well, I wanted to say one thing here too, is that there when you meet with one of our tax lawyers or if you have a good advisory, we hope if you don't, give us a call. But when you do, our goal is to help you find the right plan. And that's really part of this first topic of do you qualify? Because you may think, oh, I qualify, I don't. Well, you never know. That's the goal of the attorney to go, okay, maybe we go through a SEP for a year, then we kick it out and do this or do that. Maybe we do need to do a safe harbor 401k or, well, let's do a mega backdoor Roth IRA. So there's a lot of nuances that are going to depend on your facts and circumstances. But I think that, so that's why a consult helps. And every 401k we set up at our office, very affordable, you're going to meet with that lawyer tailoring it to you on zoom anywhere in the country. So I guess you're right, Matt. Qualifying first, right?

Yeah, let's hit that. So to qualify for this, you must be self employed with no other employees other than you, spouse, kids or business partners in the company. And the solo K concept, just to make sure you understand this, this was created specifically for people that don't have a lot of employees in a company. It's just you, you're the real estate agent, the broker, the consultant, whatever it is, you don't have a whole team, right? This is just you. Or maybe it's partners or family that can still work, but all the 401k rules and matching and employee issues, and that is, you don't have to worry about any of that with the solo K. And that's why. So we want to make sure you qualify for this so you can get this kind of like expedited, more simple 401k that you can put 70 grand a year into.

Yeah. And that's what makes it more affordable to set up too is because there's not census or a census of all the employees and their ages and their wages and all that. Now here's what's interesting on this point. Maybe you do have an employee right now. You might qualify still because you're disqualified once you have an employee that hits a one. A full time employee that hits a one year anniversary.

Yeah.

So. And we'll come to part time employees here in a moment.

Yeah, it's all part time in a second.

So we're in the middle of 2025 essentially, or the third quarter of 2025 right now. So if you hired a full time employee six months ago. Okay, great. You can still do a solo 401k this year. And then in fact you turn the corner and then when they hit their anniversary date, that's when your solo 401k would have to end up. Now Matt, in fact, I'm going to ask you that is it, it's the year they hit, it's not the date. So if they, you have a full time employee that in the middle of 2026, that's their anniversary date. Yeah. Then you can't make a contribution to a solo for the whole year. Or you could up until their anniversary.

You could up until their anniversary date because they don't qualify to participate in the 401k until they've worked for you for a year. When we set up the solo K, you can put that as a requirement that you know, this only works if you've worked here for a year. Now by the way, if you're a brand new business owner setting up a solo K, don't do that because you'll self select yourself out. But, but let's say you've been in business for a while anyways, you create a new 401K. Say hey, this is only available people that have worked for a year. That the IRS lets you do that. That way if you do have employees that kind of come and go, or even that one stays for over a year, you at least have that window of one year. But in your example, you set up a solo K right now and you have an employee that started a few months ago, you're good for 2025 contributions. And once 2026 hits, you can make your 2026 contributions. But let's say that employee has then been a year with you in June of 2026. That's when you cannot contribute anymore. Which was fine. If you Already get your 2026 contributions in. So now you must have earned that income through 2026 so far. Right. So that's how the solo K work. If you did have a full time employee, and we do have that, we have clients that have solo 401ks and they basically keep them and keep investing them. Maybe they roll it to an IRA or a Roth ira. If it's a Roth solo K. Once they have that employee, you could even transition to a group 401k. Much more complex and much more costly. But you have another options there. It's not like the 401k is done or you can't use it. It's just like you're not putting new dollars in the solo K structure anymore.

Yeah. It's really a way to unlock the Solo 401k for one or two years depending on when that anniversary date for your first or your other full time employee. Now the rule with part time employees is if you have any part time employees that have hit their three year anniversary, that's when you'd have to include them in the plan or close down your plan.

So

and full time is versus part time. It's a little different test. What is it? It's like 30 hours.

It's like, it's almost like in the 20s. It's, it's like you're like since when is that full time? So what I will say is it hits faster than you think. So if you're like they only work 30 hours a week for me that's full time for purposes of this test. So just be careful on that. If you do have any employees. Now if you have, let's say you're a real estate broker and you have agents that are 1099 to you, you don't have any other employees.

Cool.

You're not, those aren't employees. The people you 1099 that are legitimate independent contractors. That's not counting in here. This is only real W2 employees that you're employing in your business.

Also, let's say your kids. Yeah. Your kids. Remember. Or your spouse. Don't violate that rule. You could all play in the solo. So think of it like a family solo plan.

And your business partner if you have another owner in the company.

Yeah. So that's the rule to qualify. Now there's a lot of nuances. Again, we won't go there today where you may do a sep before you say I'm going to go to a so because you can qualify for a SEP with employees at a different time measurement. But I'M not going to open that can of worms. So there are stages and options as you're going into this arena. So get a consult and this is something you got to do before we have a special right now. You'll see it down in the description. We do it every year in the month of October because we got to get this done. If you call us in December, I don't think it's going to happen. It's going to be really hard.

So yeah, we want to get these solo case set up so you can maximize your 2025 contributions. We're going to go through contribution rules here in a second because that's about how to maximize the solo 401ks get your dollars in. But the you have the most option, the most opportunity to get the most contributions in. If you set up the solo K plan in the year that you want to contribute. If you set it up later, you can still get money and there's just some more restrictions and loopholes you got to jump through. So, so that's why we like to just get them set up. Now. If you're thinking about I want to make 2025 contributions now. One other thing I want to say on the qualify to keep in mind is we're talking about businesses that sell goods or services. You could be a sole proprietorship, an S corporation, an LLC that's single member, you know, taxes, a sole proprietorship, a C corporation. All right, Those all work. And you can have a solo 401k so long as that entity is selling goods or services. If the, if the entity is like an LLC that owns a rental property, for example, that doesn't qualify, that's investment income or rental income for tax purposes. That's not selling goods or services. So 401ks were meant for businesses that have employees that are selling goods or services. Think of it that way. So whether this is a side hustle or main hustle for you, as long as you're selling goods or services, you're good. But investment asset type holding entities, real estate is the classic example. That entity cannot create a solo K plan.

Yeah, and I, I just really on this qualification topic, there's not much more than that. You can set them up at any age. You could have as little income is ten grand or less. You know, you've got to have wages in order to make a contribution if you're doing an S corporation. So again the type of entity you have could play into it, but really it's wide open unless it's a passive rental property Type entity or you've got employees that hit these triggering dates of anniversary. So super exciting. 40 million Americans now it's estimated have a side hustle. And then you can have a solo 401k. I mean it's just super cool. So. All right.

Yeah. Even if, and I'll say even if you have a day job with a Solo 401k, you know when you got the side hustle. So you have a day job, your match, you're getting a match at work in your 401k. You can also get one in the side hustle.

Totally.

All right.

Qualification. I mean, sorry, contribution amounts. You want to.

Well, let's talk about the setup and documents here for a second. I'll get that fast because I just want to like, let's get this thing set up. Just so you know what's involved. There's two main things you're going to need. One is a IRS pre approved plan document. We have that. Or you know, Fidelity or whoever you're using, you need an IRS pre approved plan document. Now we have that. And in our solo 401k plan we say you can invest in whatever you want. So as you get out there and look at setting up a solo 401k plan, you want to be have in mind of like, what am I planning to invest into? And if you're like, well, I'm just going to buy stocks. Okay, go do that. At TD Ameritrade, they can set up a solo K or Fidelity because they don't charge you for it because the only thing you can buy is what they sell. They'll make money selling you mutual funds, stocks or ETFs in your account. But if you're like, no, no, no, I want to do real estate. I want to invest in crypto or precious metals or a private company. Well, they don't let you do that. That's what you need, a self directed solo K, which is what all our plan allows you to do. And so our solo 401k plan is open architecture, doesn't restrict your investments. And that's an IRS pre approved plan. So that's part one. The other thing is you do want a separate ein for this. This is going to hold other investment assets. It's going to have income, it's going to sell stuff you don't want to be using your social or your business ein. The IRS will be looking for what's happening on that on your company return or your social. We want this, any of those investments or income. We want to be using that EIN for the Solo 401k. So we'll get a separate EIN as well for you as part of that process. But our team's handling this, setting it up right, getting the documents plan, document adoption agreement, ein. And we give you a. Also kind of a guide on how to operate the Solo 401k as well.

And this is not. This is the one area where going DIY is almost not even possible because you have to have this approved document. And people, it's not one sheet of paper like filing an LLC at the state. And you can try and Mac it out yourself. But with this thing, it's going to be a binder. And there's a lot of questions to answer in that document. And that's why we put a lawyer with you to knock it out. Very affordable. And you're going to be able to tailor it to what you want to do with it. And then we get you the EIN Third step. Open a bank account and you're going to start to put contributions in there. You can self manage or self administer or self trustee your own solo 401k. Now we have a reporting service that's very affordable next to it where we can track things for you and do the tax returns. We'll come to that in a minute. But you really do control the destiny of this 401. And you can open LLCs, you can. You need to open a bank account. You're going to track the contributions, the matches. Pretty exciting.

Yeah. And we help with all that bank account set up, custodial accountant directed to hold the investments and process the money. You can get a checking account, link to that so you can write the checks and go make investments as trustee, as Mark said. All right, now let's hit contributions. You know, sorry, I want to make sure we got the setup stuff in there. Because you do that. That's the key part here, is we actually need that plan set up, signed and adopted by your company. And remember that that solo 401k plan is a plan that the company adopts for the benefit of its employee, which happens to be you. Whether it's Vandalay Industries and you're Art Vandelay. You know, the solo 401k plan is at the Vandalay Industries 401k. And you, Art Vandelay, have an account in the Solo 401K. That could be Roth, could be traditional. You could be doing Roth and traditional in that as well. Okay. Did you like the Art Vandalay? I didn't even get a Chuckle on that.

Well, I. Maybe I've heard that joke so many times, I should have given you kind of the gratuitous laugh. I am so sorry for those Seinfeld fans out there. Yeah. Art Van Lake has got a really.

He's a legend. He's a legend.

Big reputation. Yeah.

All right. Contributions. Okay, now here's getting money in the solo 401k I mentioned earlier. You can put $70,000 a year into a solo 401k. That's like 10 times what you can put into an IRA. That's one reason we love this. So if you qualify for the Solo 401K, you're someone that's self employed. This is the. An awesome vehicle to get money in. Whether you're doing Roth contributions and growing tax free dollars, or you're doing traditional dollars and taking a huge deduction. This is an awesome strategy. Okay, so there's two components of how that 70k works out. The first thing is the employee contribution, which for 2025 is. Is 23,500. As long as you make $23,500, you can put in $23,500. Okay, I'm sure we'll get to an S Corp scenario here for those of you that are S Corp owners. Cause that's probably what you should be if you're a business owner making good money. The second component of what you can put in is the employer contributions. That first 235 is employee. That's dollar for dollar on what you make. If you make 10 grand, you can put in 10 grand. If you make 50 grand, you can put in 23, 5. Okay, that's just the max. And it goes dollar for dollar. The second component's employer. And this gives us another 46,500 we could do that'll get you to that 70k total. But what this is, is this is 25% of whatever your W2 is for you that are ESCORP owners. So let's say your W2 is 100 grand. That means you could put in $25,000 right, as the employer contribution on top of the 23 5, which would get you to 48,500 in that example.

All right, so now I want to point out just two things here that are interesting, everybody. Let's say you are not an S corporation. You're only allowed to put in 20% of your profit. So if you're going to make 100 grand, then you're going to only be able to put in that 20% plus

the 23,5 so you get 20 grand plus the 23,5. But that's only 43,500. Yeah, 48. 5.

And the interesting point is that as you start to evolve to an S corporation, we want to be cramming down your salary so you're not paying as much FICA and then maximizing your 401k. And it's a balancing act. And there's a sweet spot because we don't want to pay so much in FICA that you just get to put in a few extra dollars in your 401k. It's not worth the traction. A lot of times it's not worth the squeeze. And so we want to like be very artful at this time of year. This is why the fourth quarter is so busy for us, because we're pulling the trigger on the 401k. And then we're tidying up your salary levels. Which brings me to the second point. Matt, I want you to comment on both of these. So that first one is kind of. That magic spot is also.

Are you calling it the magic spot now?

Sweet spot. Magic spot. And I'm. And we're going to get in trouble. I'm about to talk about your wife here and that is putting your spouse on here. I don't know what you were talking about. What were you thinking? So we're going to talk about putting your spouse on payroll. I was just teaching a class yesterday to a group of RV owners and they're living the dream. Full time RVers traveling around the country. And the big question was, well, do I put my spouse on payroll so they can get Social Security and also start paying them? Well, that's a, it's a myth that that's a, that's not a good thing to do because a spouse is going to get half of their working spouses Social Security and It's averaged over 35 years of income. So we'd have to start giving you some major salary before you'd ever catch up to the half that you're already entitled to from your working spouse. So I'm just going to get to the reveal here. And that is the only time you want to put your spouse on payroll is so you can put money in his or her 401. So now we want to find that perfect salary level for them without doing too much either. And sometimes just the deferral is fine. If it's 23, five, let's put this spouse on payroll for 25 grand. Boom, put away that more than they could in an ira. They still can do an ira. And so we're getting that magic. So finding your. The moral of the story is we want to find the perfect salary for you and possibly for your spouse so that we're maximizing both contributions without paying the dreaded self employment tax too much.

Yeah. And keep in mind that 70k amount that you can put in is. Is individual max. So like, that's not for the solo K in. In total, this is your solo K plan. You know, like Art Vandalay could be doing 70k and then Valerie Vandalay. What's your name?

Valerie.

Valerie. I go. I like, I like, you know, sing with the V's. So Valerie Vandalay, she could be doing 70k in hers too. Right. So now again, you'd need the right W2 to max that out. And I think that gets you to like 160k or something on a W2. But. But just to get that total max out. But think of this. Just think if you both did 50k on your W2, right, you're doing 23,5 plus you get 12,500, which is 25% of the 50k. Right. What are we at now? That is 45. That's $46,000. No, sorry, $36,000 that I can put in a solo K. My spouse does a $50,000 W2. They can do $36,000 into a Solo 401K as well. That's under their name and an account for them. So same thing. Your kids are in the business working and you know, maybe they're making five grand, ten grand. They could be dropping money in a solo 401k too.

Yeah. And I. You know, if we're going to stay with the Seinfeld theme, let's presume George Costanza would have pulled off his wedding with Susan. You remember Susan.

That's right.

They were gonna get married. And then they would have had to manage that because Vandelay Industries was George's dream company. He always wanted the art.

Yeah.

But if you remember. How did Susan die? Little trivia. Remember how Susan died?

They never got wedding invitations. Cheap wedding invitations.

Clue killed her. Oh, my gosh, it was so funny. All right, well, contributions is really the, the artistic and the strategic spot of this whole process because the Solo 401K gives you so much flexibility that once you're in the party, you're like, okay, I got all sorts of options. And as Matt alluded to earlier, you could do a Roth contribution and then the company could be a traditional. Meaning the company gets a write off for the match. But you that Roth bucket inside your 401k could be invested differently. Also, you could convert on day two the company match to Roth and then to have your Roth IRA on the side. We call that the mega backdoor Roth. So you kind of get this, you can start really playing around with this if you want just Roth money or if you want the write off. And that's a big debate. I mean, we've gotten into almost fist fights at conferences on which one's better, a Roth or a traditional contribution. And how old are they and what's their income? And oh my gosh, I mean, it's. Yeah, it's. I don't think I can even solve for that one.

Yeah, I'll even say this on rollovers, you can still roll over. You got an old employer 401k or even a traditional IRA. You can roll that into the solo 401k. Roth IRAs, by the way, can't be rolled in or transferred to a Roth Solo 401k. You can go for Roth 401k out to Roth IRA, but you can't go Roth IRA into Roth 401k. So. But that sol, it's good for new contributions as we've been going through here, but also for any transfers and rollovers of other retirement account dollars you have. Like I said, the old employer 401k or even a traditional IRA or SEP IRA could get moved in and consolidated into this solo 401k.

So another unique strategy here, just like Matt said, is you might have old 401k or IRA money and you're like, I don't know if I want to make new contributions this year, but I sure love that solo 401 because I can borrow from it. So you could take old IRA money or old work employer money and roll it into your new Solo 401K and borrow up to 50% or $50,000, whichever's less. And now you're paying interest back to yourself, tax free into your 401. So that 401k could be the small business loan you're looking for or something smart. Not a trip around the world, but let's use it. But that's something you can't do in an IRA. But the Solo 401k would allow you to do.

Yeah, and that's called the participant loan, unique to 401ks. Our plan document allows for that. You pay that back over five years, by the way, with lease quarterly payments. You could do it monthly or at least quarterly. But We've seen a lot of people use that for to start up a small business. They start up their new S corporation, they roll over existing IRA or old 401k dollars, they go invest some of it and they take a loan out. It's not a distribution, not taxable, no penalty. They can access that money to buy some, maybe inventory or get some of your business startup costs going, some education, training, whatever it might be, and then you're paying it back, like Mark said, into your own 401k. And if you use it for a business purpose, you're expensing that interest as well. It's a pretty freaking awesome strategy. And I love that one. I didn't even think about that one. Another great benefit on the solo kick. All right, let's hit investing for a second here. Just we want to make sure you know one thing. And of course, this is, you know, we have a whole separate podcast on this, the directed IRA podcast, where we talk about self directing when we're talking about a solo K. You can go buy stock, sponsored mutual funds. Okay, I'm not against that. But that's not all that you're. You can invest in. Like when you have a self directed solo 401k, which is what we set up, you can buy real estate, you can invest in a private company, you can buy crypto, you can buy precious metals. Okay, you can invest in a private fund. These are all assets your solo 401k can own and invest in. We're not saying you have to go to Wall street and buy more stocks, bonds, annuities, or mutual funds.

Yeah, it's just super exciting. And it's all about the rate of return. Folks don't get fixated on maybe some of the costs or issues that seem like they're hurdles.

Those.

That's a, It's a cost of doing business. And just put it into the equation. You might be able to get A0 cost 401k at Fidelity, but like Matt said, you can just buy Fidelity product. And so you're like, oh, well, I got to pay a thousand to go set up this 401k over here. And I get, you know, $300 a year, 400 a year, whatever it is. And I got to maintain it. Yeah, but what's your rate of return inside that solo 401k? Investing in what you know, and investing in something else that could get you two or three times the return you would get over here, just a simple mutual fund. Not that they're not bad, but wouldn't you like to do both and you can. And one other thing we need to mention in this whole process is if you already have a solo 401k, you may be like, darn, I'd love to have one of those that I can self direct. And this is awesome. This is what I wanted and never got, or I never dreamed it was possible. Well then you can make an appointment and instead of setting up a brand new one, we would restate your current one with a new plan document that it gives you this freedom so you can get to the same point without having to go through a big redo. That's cumbersome and expensive.

Yeah, and we see that quite a bit with someone that, say, had a solo 401k at TD Ameritrade, but that solo 401k plan document only lets them buy stocks, bonds and mutual funds. They're like, well, I want to buy this rental property or invest in this crypto, you know. Okay, well we will restate that solo 401k plan. Still the same name, it's still the same ein, still the same plan, but we will restate that to a plan that allows you to own these other private alternative assets. All right, let's talk about the last one here on the list, which is maintaining the Solo 401K. There's really two important components to this. Even as a general rule of thumb, the IRS requires you to have good records of what's been put in the 401k, what it's been invested into, income in it, expenses and all that. But there's really two criteria of things you got to make sure you're doing. One is you got to make sure your plan documents stay up to date. The IRS requires you to, at a minimum, have your plan documents updated every six years. When we are doing a solo 401k plan for you. When you have an account with directed where we handle the account for you, we are going to do your annual amendments. Sometimes it's every two to three years. The IRS will require it, but we send those out and we automatically update your plan for you. The second requirement is a tax return. Generally, solo Ks that are under 250 grand do not need to file a tax return, and that's total assets at the end of the year. Once your solo 401k has more than $250,000 of assets on December 31st at the end of the year now has to file a tax return. This tax return, there's a simplified version of it called a 5500EZ. There's no tax due on it, but this is a disclosure filing requirement that you have to file for your solo 401k. So again this is something we automatically handle for you. So when you have an account directed we include all this maintenance for you once the solo 401k plan is set up. So make sure for any of you that have a solo 401k or setting up that you understand the filing requirements for this and that those that 5500EZ is getting filed if you have more than 250k in assets in it and also that your plan documents stay up to date.

Gosh, wonderful summary there Matt. And I just want to add that don't forget right now if you're listening here in the next few weeks from our from the date of this that we have ACE Annual special and the details are down below. We can get you a 401k plan set up with the law firm and then directed IRA is there as your custodian to help make sure those tax returns are done and do the reporting so you kind of get that yin and yang so that you get the right plan and then you know that the maintenance is taken care of. Again, extremely affordable compared to a full blown employer plan.

Yeah, yeah. So click the links below. Get over to KQS Lawyers. That's our law firm, directed ira. That's where we handle maintenance and custodian of the account for your solo 401k. We've got a lot of other resources there to help you, a whole team behind us to help make sure you're successful at this and please make sure you subscribe to the podcast if you're not already. Please share with your friends and family. Give us kudos or you know a like or a five star whatever you can do. We want to help get the word out there to more business owners and investors and we'll see you next time. Thanks for being here.