'Life Cycle' of a Retirement Plan: Setting Up a Solo 401(k)—And When To Shut It Down

When we talk about 401(k) plans having a life cycle, we mean that as literally as it can be meant. They are born, they exist, and then they’re terminated. It’s a useful analogy because it draws attention to the distinct stages of a 401(k) and creates a blueprint for managing it.

What is a Solo 401(k)?

Solo 401(k)s are the same as any kind of 401(k) but they’re for those who run their own business as sole proprietors. Typically, an employer would set up a 401(k) for you, but as a sole proprietor, you are the employer. You have to do it yourself. It may sound daunting, but it’s not as hard as you might imagine.

The Birth of the Solo 401(k) (How To Set It Up)

Let’s face facts. The economy is changing. Salaried careers still exist, but more and more folks are proprietors in the gig economy. That means they run a business out of their own homes or use their own capital and property to support themselves.

If that describes you, and you’re looking for options to save for your retirement, you should know that the 401(k) allows you to save more money than other kinds of retirement vehicles. As the “parent” of the plan, you must sign an Adoption Agreement. In order to do that, you must have an EIN (Employer Identification Number).

Setting up a solo 401(k) isn’t difficult, but there are quite a few forms to fill out. The second form identifies a Designation of Successor Plan or Administrator and requires a notary or a witness.

For individuals you will also need to fill out:

After all this, your solo 401(k) has been born!

The Operation or Execution (the Life) of Your Solo 401(k) Plan

First, you’ll need a place for it to live. Many people erroneously believe that the only place you can “house” a 401(k) is at a bank. That’s not true and it may not even be close to the best option available to you.

You’ll also need to nourish your solo 401(k). Remember that you can roll over funds from previously established 401(k)s or even IRAs.

You also don’t want to raise a delinquent child, so you will need to ensure that your 401(k) complies with IRS regulations. That includes reinvesting the money that your plan generations and being aware of which transactions are prohibited.

Death or Terminating Your Solo 401(k)

This is where we hope the parent/child analogy falls a bit short. The plan will terminate after the sole proprietor shuts down the plan and begins taking disbursements.

While the process can be managed on your own, it helps to have a financial professional on your side who can help ensure you remain in compliance with IRS regulations.