How to Hire Employees for Your Business When You Have Invested in a Solo 401(K)?


A self-employed business owner or entrepreneur without employees can find self-directed retirement plans like a Solo 401(k) most attractive. It is for someone who operates within an owner-only business milieu. People choose this option for its contribution limits and maximum asset control. With this, you can use your savings to invest in different areas, such as venture capital, real estate, and cryptocurrency. An easy-to-manage format and relatively less demanding reporting system than bigger employer plans make it more suitable. You are the trustee of this plan, so you get to manage your retirement savings without worrying about how to save for others.

Due to various reasons, this individual 401(k) frequently features in the suggestions for the 5 best retirement plans for self-employed people. The eligibility criterion is also simple – run a for-profit business to sponsor the plan. Your business can be a corporation, LLC, or sole proprietorship. It doesn’t matter. However, the business must make income. You cannot have a non-owner employee in your company dedicating over 1000 hours annually (20 hours a week in one year). When your business grows, you may want to add full-time or part-time workers. In that case, you must cover them under the 401(k) plan as per the law. When non-owner employees join, your solo 401(k) loses its simplified version. What does it mean? Do you need to panic?

The experts say you don’t have to worry about your employees in this context for one service year. That means you can plan a transition. You have two options – switch to a full 401(k) plan to cover your employees or rollover your funds from a solo 401(k) to an IRA.

Transitioning to complete 401K

A 401(k) plan is essential to save big for retirement. But a few factors need close attention. Many variables can make managing your self-directed 401(k) plan challenging. For instance, upgrading to a full 401(k) from a Solo 401(k) requires you to file form 5500, no matter the value of your plan. Do a non-discrimination testing every year to make proportionate contributions to employees without differentiation. You may need a third-party administrator to monitor the investments. Plus, watch your investment in real estate and other non-traditional assets because of the restriction on how much you can invest in them. If you can invest in non-traditional assets, the participating employees can also do it. That’s where the other option can make more sense.

Rolling over to an IRA

You can close your Solo 401(k) if it has real estate or any such asset by transferring them to a self-directed IRA. You can manage your investments. Since IRA is an individual plan, it will not have any link to your business. Consequently, you can operate as you wish with your assets. IRAs can be different, but traditional IRAs can help more. Although you can expect little from it regarding future contributions, it lets you hold your existing assets. You can start a new conventional 401(k) one year later.

Your business can also invest in SIMPLE or SEP IRA, which accept higher contributions. However, your employees will also get access to them. Unlike a self-directed 401(k) plan, a self-directed SEP allows you to invest in your choice of a non-traditional asset, like real estate, while your workers try other things.

Nevertheless, a Solo 401(k) is one of the best moves. Since there are options to move when you hire employees, you can relax and continue to reap the benefits of this plan.