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 Individual 401k is the newest and most exciting retirement plan to benefit the self-employed, thanks to the recent tax law created by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). This tax law became effective beginning January 1, 2002 and provides significant advantages to small businesses whose only employee is the owner or the owner and their spouse. These self-employed business owners can establish an Individual 401k plan and take advantage of this powerful retirement savings tool.

What makes solo 401k plans unique is that compared to other self-employed retirement plans, greater contributions may be made at identical income levels, therefore maximizing retirement contributions and valuable tax deductions.

With a Solo 401k plan, you can contribute the lesser of 25% of your income OR $57,000 for 2020 ($58,000 for 2021). Be sure to check with your tax professional to determine your max contribution.  The annual Self-Directed Solo 401k contribution consists of 2 parts:  1) a salary deferral contribution and 2) a profit-sharing contribution. The total allowable contribution adds these 2 parts together to get to the maximum Solo 401k contribution limit.

Self-directed Solo 401k contributions are flexible. Both the salary deferral and the profit-sharing contributions are discretionary and can be changed at any time based on business profitability.

The Self-Directed Solo 401k contribution limits can be doubled for husband and wife businesses. Businesses with a spouse on the payroll can also contribute to the Solo 401k. There would be one Solo 401k for the business with two participants.

Solo 401(k) plans offered by uDirect IRA Services accommodate sponsoring businesses that are partnerships.  If there are no other eligible employees, just those two partners participating, then it would still qualify as a “single-participant plan” (solo 401k) with less administrative burdens.

[Note: the rules for determining if a plan is a single-participant plan can be found in the Instructions to Form 5500-EZ on the IRS website.]  If they do have (or later hire) common law employees (i.e., who aren’t partners) that are eligible to participate, then it will automatically become a regular 401(k) plan and they will likely need to hire a professional third-party administrator (TPA) who can assist with all the ERISA bonding, benefits testing, and reporting requirements.

If you’re ready to use this information about solo 401k plans to prepare for your future, please call us at (866) 745-0228. We’re always ready to discuss more information about Individual 401k plans and how a self-directed plan can be right for you.

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.

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.