Solo 401k plan: Also referred to as: Individual k or Individual 401k, Solo k or Solo 401k, Uni k or Uni 401k, Single k or Single 401k, Personal k or Personal 401k, Self Employed 401k or Self Employed k.
Also available in a Roth Solo 401k plan.
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Solo 401k News:
solo 401k - Google News
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IRA Financial Group Introduces Free Online Solo 401(k) Contribution Calculator ... - PR Web (press release)
Free Webinar on the Solo 401(k) Plan - The Ultimate Retirement Solution for ... - PR Web (press release)
Bergman Law Group Launches Free Informational Site about Solo 401K Plans - PR Web (press release)
FinancialSuccessInstitute.org Announces New Resources Outlining Why the Self ... - DigitalJournal.com (press release)
FinancialSuccessInstitute.org Releases Important Tax Year Information for Self ... - PR Web (press release)
NCPR Regional News Archives - North Country Public Radio
Jim Hitt, CEO Of American IRA LLC-A National Provider of Self-Directed IRAs ... - PR Web (press release)
Retirement is not an option for rocker Kenn Kweder - Delco News Network
Backstage in South Florida: George Zhen's Visionary Ambitions - Broward-Palm Beach New Times (blog)
It makes sense for very small business – whose only employee is the business owner or the owners and their spouses – to open and contribute to a Self-Employed 401k retirement investment plan.
Solo 401k plan Eligibility Rules
The sole proprietor must have no additional employees other than the spouse of the proprietor or partnerships whose only employees are self-employed partners and their spouses. The administrator of the plan is simply the business owner, their spouse or a partner. However, a designated third party works as well.
The Solo 401k plan 5 major Benefits & Rules Discussed in this Article
- Complete contribution flexibility – You decide each year whether to contribute and how much to contribute.
- There is a catch up contribution (age 50 and up)
- It’s a major improvement for those who are looking to gain the maximum out of their contributions to a deductible retirement account. With a Solo 401k plan, annual contributions consist of two parts, and two is better than one.
- You can contribute up to 100% of the first $15,000 of your 2006 compensation or self-employment income ($20,000 if you’ll be 50 or older at year-end).
- You can contribute and deduct an additional amount of up to 25% of your compensation income, or 20% of your self-employment income. This is similar to other small-business retirement plans.
Rollover to a Solo 401k plan
You are allowed to rollover or transfer your investments into a traditional IRA, SEP, Qualified Plans or Keoghs (Profit Sharing, Money Purchase Pension, and Defined Benefit), 401k, 403b and governmental 457 plans into the new plan. SIMPLE IRAs are eligible for rollover after a two year holding period is met.
Setting up a Solo 401k plan
Setting up and operating a Solo 401k plan, like all qualified retirement plans, involves required paperwork and administrative support. Contributions are calculated differently for a small business corporation and a sole proprietor, plus the plan works in conjunction with many IRS rules so you might select a professional to help, but self-directed programs are available.
How are the contributions in a Solo 401k plan calculated?
The annual contribution into a Solo 401k plan consists of two parts called a salary deferral and a profit sharing contribution. Generally, both contributions are 100% tax deductible when made into a Solo 401k
Compensation for a small business corporation is defined as W-2 wages. The sole proprietor is expected to report the self employment income. This is the salary deferral contribution of the Solo 401k.
The Contribution Limits for a Solo 401K plan
The maximum allowable contribution ($44,000 and $49,000 if you are age 50+ in 2006) simply takes the salary deferral contribution and adds the profit sharing contribution amount to it and that’s the total allowable contribution. In 2007 and beyond there will be COLA adjustments that may increase the maximum limits of the Solo 401k.
For those who hate to pay taxes the Solo 401k is a very good program. While running a small business, money could become tight, with a Solo 401k plan you have the flexibility to contribute as much, or as little, as you can comfortably afford. You can always pay in less than the maximum or even nothing at all. The Solo 401k plan lets you achieve major tax savings in the good years, while leaving needed flexibility to contribute less, or even zero, if conditions warrant it. Solo 401k plan contributions and investment earnings grow tax deferred. Withdrawals after age 59 1/2 are taxed as ordinary income. Withdrawals prior to age 59 1/2 may incur an IRS 10% premature withdrawal penalty as well as income taxes. The withdraw guides are similar to other qualified retirement investment plans.
Loans for a Solo 401k plan
Loans are permitted in Solo 401lk plans, but many providers exclude this option. The loans are amortized up to a 5 year period at current interest rates with quarterly payments. Loans in a Roth Solo 401k are not available.
Who is Eligible for a Solo 401k?
A business that employs part-time 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.
The Rule for Year-End Tax Deadlines for a Solo 401k plan
You must establish your plan by Dec. 31 if you want to claim current year.
Cost for a Solo 401k plan
The cost for a Solo 401k plan is far lower than a tradition 401k. A Solo 401k plan cost can swing wildly from a basic plan starting at around $100, to a percentage of assts that could cost as much as $2,500 annually on a million dollar investment portfolio. A good solution often is a very flexible plan with a fee of as little as $250.
Other factors you should calculate into you analysis: Do you want a Roth Solo 401k plan or the option to convert to a Solo Roth 401 plan using the same third party administrator. The availability to taking a loan is often limited in many of the basic plans.
Cost for a Solo 401k plan
The cost for a Solo 401k plan is far lower than a tradition 401k. A Solo 401k plan cost can swing wildly from a basic plan starting at around zero, to a percentage of assts that could cost as much as $2,500 annually on a million dollar investment portfolio. A good solution often is a very flexible plan with a fee range from$250 to zero depending on the services.
Other factors you should calculate into you analysis: Do you want a Roth Solo 401k plan or the option to convert to a Solo Roth 401 plan using the same third party administrator. The availability to taking a loan is often limited in many of the basic plans.
The cost of investment services, and their many associated fees, including but not limited to: Trading cost, yearly maintenance, termination, and transferring fees should be reviewed. A good trading service with a true flat fee per trade, plus few if any additional fees, is about $8 per trade.
The Cost Advantages using Money Managers in a Solo 401k
With a money manager you could have the management fees paid outside the Solo 401k, allowing for more of the sheltered retirement account to grow tax free. These options are not available for Mutual Funds, commission brokers or Exchange Traded Funds (ETF). If the management fees are charged outside of the Solo 401k, then those fees could become a tax deductible expense. The benefits of more tax free dollars working for you while your receive a substantial tax deduction makes working with a money manager often more attractive.
Success with a Solo 401k plan is achieve with planning
My experience has enlightened me that over time a well maintained and properly invested retirement account can often become an investor’s single most valuable financial asset. For your future, be diligent and well prepared, or hire a seasoned professional with top money management skills, so you too can enjoy the good life in your golden years.
Have a wonderful retirement.
Solo 401k
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