Fidelity Solo 401K: 5 Surprising Tips to Maximize Contributions

Solo 401ks are one of my favorite retirement structures. And I am a big fan of Fidelity’s custodial services. But how much do you know about the Fidelity solo 401k?

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If you’re self-employed or run your own ‘side gig’ business, you can open a Solo 401K. Yes, just like you would get if you worked for an employer, you can set up your own retirement account complete with tax benefits even without working for a ‘big business.’

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It doesn’t matter if you own a brick-and-mortar business, run an online website, or you are a rideshare driver or delivery person – anyone that brings in money independently (with no employees) can take advantage of this great opportunity to save for retirement. You just have to be considered an entrepreneur or a business without employees.

Fidelity Solo 401k

As the name suggests, a Solo 401K is an individual 401K. The only exception to the ‘individual’ part is if you have a spouse – you can cover both you and your spouse in the plan. There are no age restrictions – anyone can start a Solo 401K that owns their own business and doesn’t have employees.

The fact that there aren’t age restrictions is a huge bonus. In today’s world, so many people are breaking out on their own, trying to do their own thing. If there’s one benefit that creates the largest loss, it’s the loss of the 401K. Sure, you can open an IRA, but it has much greater limitations, greatly limiting how much you can save for retirement.

A Fidelity Solo 401K allows you to contribute up to $57,000 per year (an additional $6,500 in catch-up contributions are allowed for those over 50). Just like a traditional 401K, you can make contributions pre-tax or you can invest in a Roth 401K, contributing after-tax dollars.

Drawn diagram of Planning Process

Your tax liability upon withdrawal depends on the account type. Traditional 401K owners pay taxes on the contributions and earnings upon withdrawal. Roth 401K owners don’t pay taxes on the contributions or earnings upon withdrawal.

Why Choose Fidelity

When you contribute to a Solo 401K, you do so as the employee and the employer. Here’s the breakdown:

  • As the employee, you can contribute up to $19,500 of your income (or 100% of your income if it’s less than $19,500). If you’re over 50-years old, you can contribute your extra $6,500 as an employee.
  • As the employer, you can contribute additional funds as a profit-sharing contribution. This contribution may be 25% of your earned income minus one-half of your self-employment tax. The maximum contribution is $57,000.

While you have numerous options for a Solo 401K account, Fidelity offers a simple and affordable program for side hustlers and self-employed business owners.

Fidelity offers a variety of benefits, making it easy for the self-employed to save for their retirement:

  • No cost to set up your Solo 401K
  • No annual fees taking away from your savings
  • No trading fees if you trade Fidelity index funds
  • Access to a large number of investment options

Fidelity Plan Document

Fidelity makes it easy to set up a Solo 401K. If you feel comfortable, you can set the account up online yourself using the steps below. If you’d rather have someone walk you through the steps, you can call 1-800-544-5373 and speak with a representative.

Setting up an account is simple. If you don’t yet have an Employee Identification Number, you’ll need that first. Head over to the IRS website to apply for your EIN. You’ll receive your number instantly after application.

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Once you have your EIN, head over to Fidelity’s website and download the necessary plan documents. Before you sign the documents, though, you must choose a plan administrator. Typically that person is you; however, you can assign the role to anyone you wish, such as your accountant, if you don’t want the responsibility on your shoulders.

Once you choose your plan administrator, you’ll complete the following documents:

  • Fidelity Retirement Plan, Basic Plan Document
  • Self-Employed 401K Adoption Agreement

You’ll send the original signed plan documents to Fidelity. The account set-up process takes just a few days.

Once your account is set up, you can start funding it. If you need guidance, you can use Fidelity’s Contribution Worksheet or Self-Employed Plan Contribution Calculator.

Making Contributions

You can make contributions in one of two ways:

  • Mail contributions directly to Fidelity – On your check, note your Fidelity account number and include the 401K Contribution Remittal Form with your check
  • Rollover existing retirement savings to your account – You may be able to roll over IRAs SIMPLE IRAs and SEP IRAs

You must make all contributions by your business’ tax filing deadline, which is typically April 15, unless you qualify for an extension.

Investment Choices

You are in charge of your investment options when funding your Solo 401K. Choose the funds that work for you. Consider your age, risk tolerance, and of course, the amount of money you have invested. Pay close attention to the expense ratios and choose your investments according to your desires and plans.

Spousal Contributions

As we discussed above, the Solo 401K is only for you, hence the name solo. However, if your spouse works with you, aka earns money from your business, you can include him/her in the plan.

What this does is double your maximum contributions. Your spouse can make the employee contributions, which are a maximum of $19,500 per year. As your spouse’s employer, you can contribute an additional 25% of your spouse’s compensation.

5 Tips to Maximize Contributions

  • Consider the Retirement Savers Credit. The credit begins to phase out at $65,000, but the credit is 50%, 20% or 10% of your retirement plan depending on your adjusted gross income.
  • Don’t forget the profit sharing contribution. Remember you can get to the maximum contribution of $57,000 by making profit sharing contributions over and above the employee deferral. Check your plan document.
  • Consider adding a defined benefit plan. A defined benefit plan can supplement your 401k retirement contributions. You may be able to add $100,000 in contributions.
  • Catch up contributions. Remember that if you are 50+ years of age you can contribute an add’l $6,500. This can accelerate your savings.
  • Consider a Mega Backdoor Roth IRA. If a Roth interests you, consider a Mega Backdoor Roth IRA. This can get you to the 401k max if you can’t get there with profit sharing.

If you work for yourself in any capacity, consider looking into a Solo 401K. You’ll set yourself on the right track for retirement while fulfilling your dreams of working for yourself and creating your own place in the world. Fidelity offers many opportunities to open your own 401K for very few costs and with plenty of advice along the way.

It’s never too late to think about your retirement and your financial future – consider your future today and see how you can start saving for your retirement.

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