How to Open A 401k On Your Own in 2022

If you are looking to save for retirement and want to open a 401(K) without an employer, or as a self-employed person there are options. In this article we take a look at how to open a 401(K) plan as a solo participant, and alternatives if you don’t want to go through the hassle opening one on your own has.

If you are self-employed, or your employer doesn’t offer you a 401(K) plan, then you might be wondering if you are entitled to one as a solo participant. Fortunately for you, you can still be eligible for a 401(K) plan despite not going through the traditional method.

It may be a little difficult/complicated compared to going the route of applying via an employer and generally we’d say it’s not worth opening a 401k on your own due to the fees involved — instead we’d opt for other retirement options covered below which are easier and lower-fee.

To be more clear and not bury the lead — opening a solo 401k usually costs quite some money and around $600 a year to maintain on an ongoing basis — this makes it where it’s better to fill your other retirement options before considering a solo 401k in our opinion, however you may disagree.

If you are wanting to open a solo 401k our top choice for it would be Nabers Solo 401k, as it has flat-rate pricing that doesn’t increase as you diversify your investments (like most other platforms do), and they allow you to invest in almost anything in the 401k account — from real estate, stocks, gold, futures, cryptocurrencies, or even startup companies.

If you only want to invest in a single fund like a vanguard total market fund in your solo 401k then you’d likely save a bit of money going with a more traditional brokerage to set up the 401k, however it’ll be a bit more complicated and burdensome to setup and modify, and cost more if you invest in many funds and you won’t be able to invest in alternative assets like with the Nabers account.

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4 Options Available for Self-Employed People:

There’s quite a few options available to those who are self-employed or own small businesses — one being a traditional 401k like any other employer would set up, then there’s a few other less typical employer-sponsored retirement plans you can set up for yourself (and other employees if you have any) that we’ll cover below.

Traditional 401k Account (not recommended)

We’ll keep this short — if you are self employed and not a small business owner you won’t want to do this — the fees are high, the paperwork is complicated, and it’s a major hassle to set up a traditional 401k account and it’s only worth it if you have many employees and you all would like to use it — and even then it’s often simply better for you all to opt for a solo 401k, another option we cover below.

If you do want to set up a traditional 401k account on your own you’ll want to contact a brokerage like vanguard and get guidance on setting up the required trusts and filling out the required forms and documentation required to open a proper traditional 401k account.

Solo 401(K) Account (best option)

As someone who is self-employed you can set up a 401(K) plan as a solo participant — this means that you are the only person who has access to the account and you alone decide what you want to do with it.

You can do this with most brokers (simple google solo 401k + your favourite broker name) or you can use our preferred account for this — Nabers Solo 401k — which allows you to invest in alternative assets like cryptocurrencies, start ups, private equity, art, wine, and basically anything else that’s investable.

Simple IRA Accounts (Must have business entity)

Simple IRA accounts are an option to consider for legitimate small businesses and people who have a business-entity that’s established and legally registered somewhere in the USA — they’re less expensive to set up and operate than traditional 401ks.

Simple IRAs act exactly like a 401k other than the fact that they have the limits of an IRA account (much less can be funded every year into them). Just like with traditional 401ks the employer (or your company) can match your contributions, saving on business-side taxation. Simple IRAa have significantly lower limits vs a 401k, so they’re not worth it for many high-income earners.

SEP IRA (Business-entity funded only)

Sep IRAs are like traditional IRAs, but can only be set up and funded by business entities — that means that if you want to save of your businesses tax-bill this is likely the best option for you — however there are special considerations that make it not worth it for everyone, and not viable for many self-employed entrepeneurs.

SEP IRAs have HUGE contribution limits similar to 401ks — you would want to check the exact contribution limits in your state, but most are 60,000+/year. Contributions are taxed when withdrawn in retirement, making it a good way to save on taxes for those in high-income brackets.

 

4 Alternatives Available to Everyone:

There’s many alternatives that both self-employed people, business owners, and employed people, can use — these are accounts you can open online with little documents other than typical KYC information (social security number, ID/Passport number, proof of address, etc) and are easy to open and manage yourself.

Health Savings Accounts (HSAs)

Health Savings accounts are not widely used or known about however they’re available to almost everyone — the only real limitations are that you have to have an insurance policy, be insured with a high-deductible (almost all plans are), and it must not be government-sponsored or subsidised like medicare or medicaid. 
 
This option definitely isn’t for everyone — even if nearly anyone can use it — as funds put in can only be used for medical expenses. However both on deposit and spending it’ll be 100% tax-free so it’s one of the best options for most people as it’ll save them money in the short-term, and those savings can be put back into investments and retirement accounts.
 

Funding An Investment Retirement Account (IRA)

If you do not own a business, or simply want a lower-cost option that doesn’t take paperwork or any complexities  then an IRA could be a good option to save for your retirement without a 401(K). To consider this type of account, you will need to set it up through a financial institution of course, any will do for this type of account as most offer similar plans/features/etc — whoever you already use for your traditional brokerage account likely has an IRA option.

IRAs have some benefits over 401ks — namely that they generally have less fees involved with them, and they generally allow you to invest in far far more financial assets than traditional 401ks do, some even allow you to invest in cryptocurrencies, startups, art, etc.

With IRAs you can put aside up to $11,000 each year with all funds being completely tax-free on deposit and only taxed upon withdrawal. That means dividends, capital gains, stock bonuses, everything will be tax-free if held within the account — until you withdraw it from the account in retirement, then it may be subject to tax.

Opening Up A Roth IRA

If you are under 35 and don’t already have one then you might want to consider opening up a Roth IRA — anyone can open such an account as long as they are under 35 and are a US resident/tax-payer. 

Roth IRAs work exactly the same as traditional IRAs, with the exact same contribution limits, but have a very different taxing schedule — rather than contributing tax-free and paying taxes when you withdraw, after your investments have likely increased in value many times over, you pay upfront taxes on deposits just like with regular income.

 In our opinion Roth IRAs are the best and most important tax-advantaged account to have and fill, however depending on your goals and situation it might not be right for you — if you are in the highest tax bracket for example Roth IRAs often aren’t necessarily better than traditional IRA accounts.

Taxable Retirement Saving & Investing

Of course this is an option to everyone — but I feel like it’s important to point out that you don’t have to invest for retirement in a retirement account. You can use a taxable account and pay little to no taxes as your portfolio grows if you invest with a strategy that intends to minimize your tax-obligations, and you can access the funds anytime without penalty unlike with 401ks and IRAs (which penalize you if you withdraw from them early).

Taxable accounts also have the benefit of being there for you in early retirement — if you want to shoot for retiring before you’re around 59 – 65 then saving and investing for retirement in a taxable account is just as important as in retirement accounts, as they’ll need to sustain you in early retirement before you can access your tax-advantaged accounts later in life (without penalty).

The (Limited) Options Available for Employed Folks:

Other than the above options available to everyone, if an employed person really wants a 401k in particular, like it seems many do who’ve reached out to us asking how they can open up a 401k on their own, the answer is really you shouldn’t have to — if you are working for a US employer you can generally suggest it or ask for it, if the business has more than a few employees, and they’ll get one set up.

Otherwise you can use any of the above options we discuss for self-employed people and everyone — however the self-employed specific options may require special considerations when setting up and may not always be available to you if you don’t have a non-employment source of income to justify the accounts.

Final Thoughts & Conclusions

Planning for your retirement fund doesn’t have to be a difficult process, especially if you plan to go for a solo 401k or one of the various IRA accounts available currently — The fact that there are options means that if you own a small business or your employer doesn’t offer a 401k currently, you too can feel secure knowing that you are able to save for the day you retire without having to worry about finances. 

If you are unsure about whether or not you would be best off with a Solo 401(K) plan, a Roth IRA plan, or any of the others written above, then it is always best to seek professional advice from a financial advisor — while we normally aren’t fans of financial advisors this is one area where they can certainly help.