To set up and fund a SOLO-401k (or SOLO-k) need only enough income to fulfill the minimum requirements of the custodian you use. For example, say you have $1,000 of Self-Employment (SE) income from giving a speech or filling out surveys. You have maybe $100 of expenses (prorated tax prep fees and some mileage). You can set up a 401k with as little as $900 as long as your custodian will allow you to create a 401k for that amount. Once you have your 401k open, then you have the receptacle you need to roll over any Traditional IRAs (TIRAs), SIMPLE IRA, and SEP IRA balances – TAX FREE!
So what does it really matter if you have a tiny SOLO-k? Here’s the real benefit:
- If and when you leave your current job for another position, you will want to roll out your 401k/403b.
- If you roll it out to an IRA, like most people do, you will not be able to contribute to a backdoor Roth IRA because your tax bracket is too high.
- But if you have a SOLO-k, you can roll the 401k/403b at your old employer into your SOLO-k and continue your backdoor Roth IRA contributions.
That’s why you want to set up a SOLO-k at your first opportunity!