Solo 401k / Individual 401k (self employed retirement plan)
The Solo 401k is commonly used to refer to the Individual 401k or Self Employed 401k or Individual(k), It's for self employed business owners save for their retirement.
The Solo 401k takes advantage of the existing laws found under section 401(k) of the Internal Revenue Code as well as the new laws created by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) that went into effect on January 1, 2002.
The Solo 401k is an under publicized gem in the tax law with a number of interesting features that make the Solo 401k unique relative to other popular self employed retirement plans like a Keogh or SEP IRA.
Solo 401k Eligibility
The Solo 401k is available to self-employed individuals and business owners with no full time W-2 employees other than themselves or a spouse. Businesses employing independent contractors (1099 employees) would not disqualify you from a Solo 401k. Sole proprietorships, partnerships, LLCs and corporations (including both subchapter S and C corporations) would qualify.
A business that employs part time W-2 employees may be able to exclude them from plan participation. Generally, under federal law you are permitted to exclude the following types of employees:
Employees under age 21.
Employees with less than one year of service.
W-2 employees who work less than 1000 hours per year
Certain union employees
Certain nonresident alien employees.
Summary
A Solo 401k may be well suited for the self employed business owner who would like to maximize their retirement contributions or who would like to borrow from their retirement plan using their 401k balance as collateral via a tax free Solo 401k loan.
Benefits
A unique feature of a Solo 401k versus other self employed retirement plans is the ability to receive a Solo 401k loan. Loans are permitted up to 1/2 of the total value of the Solo 401k up to a maximum of $50,000. Solo 401k loans generally have a 5 year term. Solo 401k loans used to purchase a primary residence may be extended up to 10 or 15 years.
With a Solo 401k loan principal and interest is repaid back to yourself into your Solo 401k. Loans must be repaid according to the terms of the loan amortization schedule which is provided when a loan is initiated. Failure to repay the loan according to these terms may result in a loan default causing taxes as well as IRS penalties.
A Solo 401k loan can be used for any purpose and can be provided tax free, penalty free and without credit checks or income qualifications.
Contribution Limits
In 2010 and 2011 the maximum Solo 401k contribution limit is $49,000 or $54,500 if age 50+. Given sufficient income, a husband and wife working for the same business may contribute up to $98,000 combined or $109,000 if age 50+.
Because of the way the contribution is calculated a larger contribution usually can be made into a Solo 401k than to a Keogh or SEP IRA at the same income level. Therefore the Solo 401k is usually the best option for maximizing retirement contributions and valuable tax deductions while reducing income taxes.
Solo/ Roth 401k vs Traditional 401(K)
Traditional 401k are tax deductible contributions , withdrawals are taxed in retirement.
Roth 401k is after-tax contributions, tax-free withdrawals in retirement.
Contribution Calculations
NOTE: The calculation of how much can be contributed to the Solo 401k is dependent on whether your business is taxed as a corporation and you receive a W-2 or if you are taxed as a sole proprietorship.
Retirement Plan Consolidation
Advantages of rolling over and consolidating your retirement plans this includes a Traditional IRA, SEP IRA , 401k Plan, Money Purchase Plan, SIMPLE IRA, Profit Sharing Plan, Defined Benefit Plan, 403b Plan and Rollover IRAs into your Solo 401k include improved financial organization and ease of monitoring your retirement portfolio.
Also, consolidating retirement accounts is particularly important if you would like to use the Solo 401k loan provision. By rolling over your existing retirement plans you build the balance quickly and then can use its value to receive a larger solo 401k loan.
Cost-Effective Administration
The Solo 401k plan is easy to setup and inexpensive to maintain. Administration is minimal, and complex discrimination tests are not required. IRS Form 5500 must be filed annually when plan assets exceed $250,000.
Contribution Flexibility
Each year the funding of the Solo 401k plan is completely discretionary and flexible. Funding can be increased, decreased, or skipped entirely if necessary.
Note: The deadline to open a Solo 401k is December 31st of the year in which you want to make the contribution or the fiscal year end, whichever comes first.