3 Important Questions for Your Solo 401(k) Provider

It’s important to ask your Solo 401(k) provider these three questions before establishing the plan with that custodian, as not all Solo 401(k) plans have the same features.

As a small business owner, a self-employed individual, or someone who earns a form of self-employment income, you can benefit from using the Solo 401(k) retirement plan. In the past, many small business owners and individuals earning self-employment income took advantage of the SEP IRA. At the time, the SEP IRA was often the best solution if you didn’t have an employer-sponsored 401(k).

Today, more small business owners with no full-time employees, other than a spouse, see the advantage of the Solo 401(k) versus the SEP IRA.

The Solo 401(k)

The Solo 401(k) retirement plan, also called an individual 401(k) or one-participant plan, is an IRS-approved retirement plan. It’s essentially like a traditional 401(k), except designed for one employee. However, not all Solo 401(k) plans are the same. The workings of the plan are highly dependent on the Solo 401(k) provider you choose.

For example, if you were to establish the retirement plan at Charles Schwab, your investment options will generally be restricted to traditional equities. Most large financial institutions primarily provide access to stocks, bonds, mutual funds, ETFs, and similar marketable securities.

As a result, if you want to invest in real estate or precious metals directly, that option typically will not be available through a traditional brokerage platform. The reason is that financial institutions generate fees from traditional asset investments and custody.

Self-Directed Solo 401(k) Plan

For small business owners and self-employed individuals who wish to invest in non-traditional assets, such as real estate, a self-directed Solo 401(k) may be more appropriate. With the right provider, you can establish a self-directed plan that allows both traditional and alternative investments.

Additionally, you may receive the option of “checkbook control,” which gives you direct control over your 401(k) funds and investments through a dedicated plan bank account.

3 Important Questions to Ask Your Solo 401(k) Provider

When choosing the best Solo 401(k) provider, you need to determine whether the provider will satisfy your investment and administrative needs. Your provider should be able to clearly answer any questions you have regarding the plan. However, the three most important and common questions people ask are: how to make a contribution, what type of investments can be made, and how to borrow from the plan.

1. How Do I Make a Solo 401(k) Contribution?

Contributions to a Solo 401(k) plan can be more complex than other retirement plans because you have two types of contributions: employee deferrals and employer profit sharing contributions.

As a self-employed individual or small business owner, you are considered both employee and employer, which allows you to make both types of contributions.

Elective Deferral: For 2026, if you are under age 50, you can contribute up to $24,500 as an employee elective deferral. If you are age 50 to 59, you can contribute $32,500, which includes the $8,000 catch-up contribution. Under the SECURE 2.0 Act, individuals age 60 to 63 can make an enhanced catch-up contribution, allowing a total elective deferral of $35,750 for 2026. Elective deferrals can be made on a pretax or Roth basis, if the plan allows.

Profit Sharing: Employer profit sharing contributions are based on a percentage of compensation. For a sole proprietor or single-member LLC, the maximum employer contribution is generally 20% of net self-employment income. For a C corporation or S corporation paying W-2 wages, the maximum employer contribution is 25% of W-2 compensation. Under current law, employer contributions may be made as pretax or Roth if the plan document permits and the participant elects Roth treatment.

Combined, for 2026, the maximum total contribution limit is $72,000 if you are under age 50. If you are age 50 to 59, the limit is $80,000. If you are age 60 to 63, the limit increases to $83,250 due to the enhanced catch-up rules. These limits include both employee and employer contributions.

Your Solo 401(k) provider should clearly explain how to calculate compensation, how contributions are determined, and the applicable deadlines.

2. What Investments Can I Make?

The most significant advantage of a self-directed Solo 401(k) plan versus one established at a traditional bank or brokerage firm is investment flexibility.

Traditional financial institutions generally limit investments to marketable securities. In contrast, a properly structured self-directed Solo 401(k) allows the participant to make a wide range of investments, including real estate, private businesses, private lending, precious metals, cryptocurrency, notes, and more.

With a self-directed plan offering checkbook control, the plan account can often be opened at a bank of your choosing, such as Capital One, Wells Fargo, or Fidelity Investments, depending on how the plan is structured.

There are only a few types of investments the IRS considers prohibited. You cannot invest in life insurance contracts, most collectibles such as artwork or antiques, or engage in transactions with disqualified persons. Disqualified persons generally include you, your spouse, your lineal ascendants and descendants, and entities they control. As long as those rules are followed, the investment options are broad.

3. Taking Out a Solo 401(k) Loan

Another common question is whether the Solo 401(k) plan allows participant loans. This is an important feature because it’s not available with SEP IRAs or traditional IRAs.

If permitted by the plan documents, you may borrow up to $50,000 or 50% of your vested account balance, whichever is less. The loan can be used for any purpose and is not taxable as long as it’s properly structured and repaid.

The loan must generally be repaid within five years, with payments made at least quarterly, unless the loan is used to purchase a primary residence. The interest rate must be reasonable and is typically based on the prime rate plus an additional percentage. Because the prime rate fluctuates, your provider should confirm the current rate at the time the loan is issued.

When it comes to the loan feature, you must ask your provider whether their Solo 401(k) plan documents allow for participant loans before establishing the plan.

Get in Touch

It’s important to choose the right Solo 401(k) provider. Contact IRA Financial directly at 800-472-0646 and ask us any questions you have. Our 401(k) specialists are on-site and ready to answer all of your questions.