So what is a solo 401k? A solo 401k plan is a regular 401k plan combined with a profit-sharing plan. However, unlike a regular 401k plan, a solo 401k can be activated only by self-employed individuals or small business owners who have no other full-time employees (an exception applies if your full-time employee is your spouse). Adopting a solo 401k will not be a consideration if you have full-time employees age 21 or older (other than your spouse) or part-time employees who work more than 1,000 hours a year where you will typically have to include them in any plan you set up.

Note: A solo 401k isn’t any different than a regular 401k plan except for the rules. On the contrary, it simply takes advantage of the fact that relaxed rules apply when the only individuals who participate in the plan are the owner and the owner’s spouse.

Advantages of a solo 401k plan begin with being a tax-deferred retirement fund. Therefore, you pay no income tax on contributions or earnings until you withdraw the money from the plan. Solo 401k plans are also completely discretionary, although you should always try to contribute as much as possible. The plan may also allow loans and also hardship withdrawals when necessary. Another advantage is a solo 401k can accept rollovers from another retirement fund.

These attractive features are all fine and good, but as with everything, there are disadvantages as well to be aware of. Here are a few drawbacks to consider. A solo 401k must follow specific requirements under the Employee Retirement Income Security Act and the Internal Revenue Code. There is also a cost attached with setting up a solo 401k plan. Institutions can provide limited investment choices associated with the solo 401k. Although with the demand of 401k solo plans, investments are likely to increase over time as the percentage of small business owners’ rise.

Another disadvantage is a solo 401k is it will not allow contributions to be made above $41,000, with the exception for catch-up contributions that can be made by participants age 50 or older. Small business owners with significant compensation can already contribute a maximum 441,000 by using a traditional profit-sharing plan. For your future needs, a solo 401k may not be the best option. If you hire a full-time employee who is not your spouse, and your business grows, that employee will generally need to be included in your plan. If this happens, you lose the benefit of the solo 401k’s simplified rules and also no longer have a solo 401k; instead you have a 401k plan and profit-sharing plan.

Every 401k plan has various options, advantages, disadvantages, etc. It is not only wise, but financially savvy to review and discuss with an Accountant, all your choices when making this decision. Your future investments will be affected by your decision down the road, as well as your retirement outcome. Be sure to research and take time before choosing if a solo 401k plan is right for you.