Individual(k) ~ Solo(k) ~ 401(k) for an Individual
Understanding how to open self-directed solo 401k plans can be confusing to newcomers, but we can help you prepare today. The information below will teach you how to handle this subject so you can handle your financials confidently when preparing for retirement. Learn more below:
Who Can Open an Individual 401(k)?
The Solo 401(k) continues to be one of the most powerful retirement tools for self-employed individuals and small business owners. Originally created by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and effective as of January 1, 2002, the Solo 401(k) offers significant tax advantages and high contribution limits for business owners with no W-2 employees, except possibly their spouse.
With a Solo 401(k) plan, self-employed business owners can take advantage of both higher contribution limits and the flexibility to contribute based on their business’s profitability. This makes it a great choice for those looking to build wealth, lower taxable income, or access funds through a loan provision.
2024 Contribution Limits for Solo 401(k) Plans
For 2024, you can contribute up to $69,000 or $76,500 if you’re over age 50 (including catch-up contributions). These limits consist of two types of contributions:
- Salary Deferral Contributions
– You can contribute up to $23,000 for 2024.
– If you’re over 50, you can contribute an additional $7,500 as a catch-up contribution, raising the total salary deferral to $35,000.
– Salary deferral contributions can be made on either a pre-tax or Roth basis.
- Profit-Sharing Contributions
– Your business can contribute up to 25% of your net earnings from self-employment, capped by the combined limit of $69,000 (or $76,500 with catch-up contributions).
The total contribution amount includes both salary deferrals and profit-sharing contributions. The plan allows contributions to be adjusted at any time to align with your business’s performance, giving you significant flexibility.
Double Contributions for Spouse-Run Businesses
If your spouse works for your business and receives compensation, they can also contribute to the Solo 401(k). Each of you can make individual contributions, effectively doubling the family’s retirement savings potential. This means you could contribute a combined $138,000 in 2024 (or up to $153,000 if both are over 50). Both participants will be under one plan, but each will have their own account.
Partnerships and the Solo 401(k)
Solo 401(k) plans can accommodate businesses structured as partnerships. As long as only the partners participate, it remains a “single-participant” plan with fewer administrative requirements. However, if you hire common-law employees (i.e., employees other than partners or spouses) who become eligible for the plan, it will automatically convert into a standard 401(k). This triggers additional compliance requirements under ERISA, including bonding, nondiscrimination testing, and filing of Form 5500.
For now, you can avoid the extra burden by continuing as a single-participant plan. (For more details on determining whether your plan qualifies, refer to the Instructions for Form 5500-EZ on the IRS website.)
Borrowing with a Solo 401(k) Loan
A unique benefit of the Solo 401(k) is the ability to take out a loan. You can borrow up to 50% of your account balance or $50,000, whichever is less. These loans are tax-free, with the balance used as collateral, providing a valuable liquidity option without early withdrawal penalties.
Who Should Consider a Solo 401(k)?
A Solo 401(k) is ideal for self-employed business owners and small businesses with no W-2 employees who:
– Want to maximize their retirement savings while enjoying valuable tax deductions.
– Prefer flexibility in contributions, which can vary based on business profitability.
– May want access to funds through a tax-free loan option.
Get Started with a Self-Directed Solo 401(k) Today
At uDirect IRA Services, we help self-employed individuals unlock the full potential of Solo 401(k) plans, including self-directed investment options across asset classes such as real estate, private lending, and more. If you’re ready to prepare for your future, contact us at info@uDirectIRA.com to explore how a Solo 401(k) can fit into your retirement strategy.
A Solo 401(k) offers self-employed business owners control, flexibility, and tax-advantaged savings opportunities, helping them build wealth and secure their financial future. Take advantage of the 2024 contribution limits and plan today!
Please contact us at (866) 745-0228 for more information
Self employed business owners with no W-2 employees may be well suited for an Individual 401k if their objective is to maximize their retirement contributions or if they would like to borrow from their retirement plan using their 401k balance as collateral via a tax free Individual 401k loan.
