Why You Should Consider a 'Solo 401(k)'

Summary

Podcast Summary: WSJ Your Money Briefing

Episode: Why You Should Consider a 'Solo 401(k)'
Date: July 30, 2019
Host: JR Whalen
Guest: Jeff Brown, Wall Street Journal Contributor

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Episode Overview

This episode delves into the benefits, features, and practicalities of the "Solo 401(k)"—a retirement savings option designed for freelancers and solo entrepreneurs. Host JR Whalen is joined by WSJ contributor and freelancer Jeff Brown, who shares both expert and personal insight. The discussion focuses on why the Solo 401(k) is an advantageous yet underappreciated tool for self-employed Americans, especially in today's gig economy.

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Key Discussion Points & Insights

1. What Is a Solo 401(k)?

[03:31] Jeff Brown:

• The Solo 401(k) is a retirement account tailored for individuals working for themselves.
• Not eligible if you have any employees other than a spouse.
• Functions similarly to a corporate 401(k) but is simpler to set up for self-employed workers.

Notable Quote:

“Solo means what it sounds like. You have to be working for yourself. If you have any employees at all other than a spouse, you're not eligible.”
— Jeff Brown [03:31]

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2. Contribution Structure and Limits

[03:55] Jeff Brown:

• Participants can make contributions as both the "employee" and the "employer."
• For 2019:
  • Employee contribution: up to $19,000 ($24,000 if age 50+)
  • Employer contribution: a fraction of business profits
  • Combined annual maximum: $56,000 ($62,000 if age 50+)
• All contributions are removed from taxable income.

Notable Quote:

“You wear two hats when you do this. You can make a contribution as the employee... Plus you can make a contribution as the employer... So the grand total can be $56,000 this year, or $62,000 if you're 50 or older.”
— Jeff Brown [03:55]

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3. Key Advantages of a Solo 401(k)

[04:33] JR Whalen asks; [04:38] Jeff Brown responds:

• Greater investment flexibility:
  • Similar to an IRA, you can invest in mutual funds, individual stocks, master limited partnerships, royalty trusts, etc., without employer-imposed restrictions.
• Roth Option:
  • Can be set up as a “Roth 401(k)”—helpful for younger investors or those expecting higher tax brackets in retirement.
  • Roth contributions do not provide an initial tax deduction, but withdrawals are tax-free.
• Higher contribution limits:
  • Much higher annual contributions compared to IRAs, especially valuable if you exceed Roth IRA income restrictions or want to put away significant savings.
• Upfront tax deduction:
  • Traditional contributions reduce your taxable income.

Notable Quote:

“The first one is... flexibility in what you can invest in. ...The other big advantage is that you can set it up as a Roth 401K, which is very useful to younger investors or to people who think they'll be in a higher tax bracket after they retire.”
— Jeff Brown [04:38]

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4. Why Aren’t More People Using Solo 401(k)s?

[06:23] JR Whalen; [06:33] Jeff Brown:

• Despite their advantages, Solo 401(k)s are not well-known.
• Lack of industry-wide data reflects general unawareness, even among financial professionals.
• Experts believe the Solo 401(k) deserves more attention given its benefits.

Notable Quote:

“For the people who qualify for them, they can be a terrific deal. ...I think that just reflects the fact that they're not very well known.”
— Jeff Brown [06:33]

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5. Perfect for the Gig Economy

[07:09] JR Whalen; [07:21] Jeff Brown:

• The Solo 401(k) is especially suited for freelancers, gig workers, and those with changing jobs/businesses.
• Established in the early 2000s but took time to gain traction due to slow provider uptake.

Notable Quote:

“They're a terrific deal if you're working for yourself and especially if you plan to be changing hats over the years, going from one occupation to another, having one business after another.”
— Jeff Brown [07:21]

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6. How to Set Up a Solo 401(k)

[08:02] Jeff Brown:

• Major financial firms like Vanguard, Fidelity, and Charles Schwab offer Solo 401(k)s.
• Application involves paperwork (mostly online), but can appear more daunting than it is.
• The “administrator” and “employee” roles are both you, simplifying the process.
• Most transactions post-setup are handled online.

Notable Quote:

“It looks intimidating when you first see them—pages and pages and pages. But there are lots of sections that don't apply to you. ...Most transactions can be done online, as with any other kind of financial transaction with one of these firms.”
— Jeff Brown [08:02]

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Memorable Moments & Quotes

• On flexibility and investment choices:

  “With a Solo 401k, you can invest in just about anything you want.” — Jeff Brown [04:38]

• On lack of awareness:

  “Many people were just unaware of them, even many professionals were unaware of them. ...They haven't caught on the way some other things have caught on.” — Jeff Brown [06:33]

• On transportability and adaptability:

  “They're transportable...if you plan to be changing hats over the years...having one business after another...” — Jeff Brown [07:21]

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Timestamps for Important Segments

• [03:31] What is a Solo 401(k)? Eligibility explained.
• [03:55] How contributions work; maximum allowable savings.
• [04:38] Investment flexibility and Roth option.
• [06:33] Lack of public awareness and professional uptake.
• [07:21] Why they suit the gig economy and freelancers.
• [08:02] Step-by-step on setting up a Solo 401(k).

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Conclusion

The episode strongly advocates for the Solo 401(k) as a powerful, flexible retirement savings vehicle for self-employed individuals and gig workers. With high contribution limits, investment options rivaling IRAs, and the availability of Roth benefits, it is an overlooked tool in personal finance—one that may be especially useful in the changing landscape of modern work. For more details, Jeff Brown’s accompanying article is available at WSJ.com.

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Transcript

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[Small Business Owner]

See banks and credit unions help small businesses make payroll. This bill would cut the vital resources

[Retail Industry Representative]

they need while increasing megastore profits. They deserve it, don't they?

[Small Business Owner]

Tell Congress. Stop the Durbin Marshall money grab for corporate megastores paid for by the Electronic Payments Coalition.

[Charlie Turner]

With your money briefing, I'm Charlie Turner for the Wall Street Journal in New York. Why should you consider choosing a solo 401k retirement plan? JR Whelan will discuss this with Wall Street Journal contributor Jeff Brown. First, here are some money headlines. Mortgage lenders are on a refi high like lenders made $565 billion of mortgage loans in the second quarter, the most in more than two years, as falling rates prompted homeowners to refinance. At that pace, originations could top $2 trillion for only the third year since the financial crisis, according to industry research group Inside Mortgage Finance. The rebound provided a boost to megabanks like JPMorgan Chase, Wells Fargo and Citigroup, which reported higher mortgage originations. Inside Mortgage Finance said refi's accounted for roughly half the new mortgages, the highest share in years. Refinance applications rose 43% in the second quarter from the same period a year earlier, while Purchase applications climbed 6.2% over that span, according to the Mortgage Bankers Association. Tough times for ride hailing companies and their investors Uber Technologies and Lyft went through separate staff shakeups Monday as Uber cut about 400 jobs in its marketing department and Lyft eliminated the role of chief operator officer. The two ride hailing companies have been under pressure from Wall street amid heavy losses and disappointing market debuts, with both stocks still sagging below their initial public offering prices. LetsMakeaPlan.org is regarded as the go to site for people seeking a financial advisor. The site is a directory operated by the Certified Financial Planner Board of Standards. But the Wall Street Journal says let's Make a Plan omits numerous red flags. It contains no indications that thousands of the planners bearing the board's seal of approval have had customer complaints or faced criminal or regulatory problems, often directly related to their work with clients. More than 60 have filed for bankruptcy within the past decade, although the website says they haven't disclosed such an event in the last 10 years, the LetsMakeaPlan.org site has been presenting more than 6,300 planners without showing such problems, even though the planners have disclosed them to the Financial Industry Regulatory Authority, according to a Wall Street Journal analysis of more than 72,000 profiles on the website.

[JR Whalen]

Here on your Money Briefing, we've brought to you lots of useful stories regarding 401k retirement accounts, like annuities providing years of income, or why you might consider a Roth 401. Now, here's something else. A Solo 401K. Let's find out more about that and bring in Wall Street Journal contributor Jeff Brown. So, Jeff, millions of Americans have signed up for traditional 401k accounts through their employers. But a solo 401k that's mostly geared toward freelancers.

[Jeff Brown]

Yes, I'm a freelancer and I have one myself. Solo means what it sounds like. You have to be working for yourself. If you have any employees at all other than a spouse, you're not eligible. But otherwise, it works very much like a corporate 401K. But it's a little simpler to set up and get running.

[JR Whalen]

So people can sign up for solo 401s as employees or. Or employers.

[Jeff Brown]

Yes, you wear two hats when you do this. You can make a contribution as the employee, and this year that can be up to $19,000 or $24,000 if you're 50 or older. Plus you can make a contribution as the employer, which is a fraction of the profits that your little business makes. So the grand total can be 56,000 this year, or 62,000 if you're 50 or older. It's a lot of money that you put aside, and that money is REM from your taxable income, so you don't pay income tax on it, just like contributions to a corporate 401K.

[JR Whalen]

So, Jeff, what are some of the big advantages for somebody who's signing up for a solo 401k?

[Jeff Brown]

Well, I think there are two. The first one is that you have great flexibility in what you can invest in. It's much like an IRA or a rollover IRA where you can select pretty much any product that you want. Mutual funds, individual stocks, even things that are a little bit out of the ordinary, like master limited partnerships and royalty trusts and things like that. And you don't have to go through a lot of hoops to get them approved or anything. So unlike a corporate plan, where you're limited to the investments that are selected by the provider and your employer, which are usually some sort of mainstream stock funds, index funds and things like that, or target date funds, with. With a Solo 401k, you can invest in Just about anything you want. The other big advantage is that you can set it up as a Roth 401K, which is very useful to younger investors or to people who think they'll be in a higher tax bracket after they retire and are eligible to make withdrawals. The Roth allows you to avoid tax on your withdrawals. You put in after tax money at the beginning so you don't get the upfront tax break. But it's a good trade off for many people. And you'd have the high limits of putting in 50 some thousand dollars or 60 some or more when you might not be eligible for an ordinary Roth IRA or would only be limited to a small contribution each year. So those are the two main things, the flexibility and the Roth that most the experts say are the chief advantages. Plus of course, the tax deduction on contributions. If you have a traditional plan, you

[JR Whalen]

know, solo 401ks, as you point out in the story you wrote for the Journal, have not really gotten the attention that they might deserve. But they provide a lot of flexibility, like a long list of investment options

[Jeff Brown]

for the people who qualify for them. They can be a terrific deal. And I searched all over for industry wide data on how widespread these things are and I absolutely could not find it. So I think that just reflects the fact that they're not very well known. And a lot of the experts that I talked to, financial advisors and people who help clients set these things up, said that many people were just unaware of them, even many professionals were unaware of them. And it's not that they're obscure or unknown, it's just that they haven't caught on the way some other things have caught on.

[JR Whalen]

And you know, we're living in this gig economy now where people go from job to job to job, sometimes simultaneously. And it really does seem to be the right thing at the right time, given the kind of job market we have.

[Jeff Brown]

Yes, they were established in the Bush tax cuts of 2001. And I remember when I stumbled across them a number of years later that a lot of the providers that I talked to at the time, looking for one for myself, hadn't organized the system yet. They just didn't offer them yet. So they're sort of slow to get going and they're catching on a bit more according to people I talk to. But they're a terrific deal if you're working for yourself and especially if, if you plan to be changing hats over the years, going from one occupation to another, having one business after another because

[JR Whalen]

they're transportable and how does somebody go about signing up for a solo 401k?

[Jeff Brown]

Well, you would contact a provider and there these are the big financial services firms like Vanguard or Fidelity or Charles Schwab. All, all of those three offer them. And you go through some paperwork. Most of them have these online. And you'd fill in some forms. It looks intimidating when you first see them. They're pages and pages and pages. But there are lots of sections that don't apply to you. And you don't have to go back and dig up financial records from decades ago or anything like that. It's asking who is the administrator, which is you, and who are the employees, which is you again, and a few things like that, facts that you'd have readily at your fingertips. And it doesn't take very long. And then they take a little bit of processing time to get the thing up and running. And then once you have it going, most transactions can be done online, as with any other kind of financial transaction with one of these firms, you know, where you, you, you log onto the account and you make investments or make withdrawals. Some require actual physical paperwork that have to be scanned and sent in or sent by mail. But most things are just done online. Most transactions.

[JR Whalen]

All right. You can see more details about the solo 401s in Jeff Brown's story on WSJ.com and the WSJ app. Jeff, thanks so much for coming on the show.

[Jeff Brown]

Well, thank you for having me.

[JR Whalen]

And that's your money briefing. I'm JR Whalen in New York for the Wall Street Journal.

[Small Business Owner]

Access to affordable credit helps me pay my employees, but I don't really need it.

[Retail Industry Representative]

Inflation is killing me, but who cares? Big retailers are making record profits. That's why we support the Durbin Marshall credit card bill.

[Small Business Owner]

See banks and credit unions help small businesses make payroll. This bill would cut the vital resources

[Retail Industry Representative]

they need while increasing megastore profits. They deserve it, don't they?

[Small Business Owner]

Tell Congress Stop the Durbin Marshall money grab for corporate megastores paid for by the Electronic Payments Coalition.