The Solo 401(k)

A retirement investment vehicle designed for small businesses

Do you work for yourself? Then you may want to consider the solo 401(k), which marries a traditional employee retirement savings account to a small-business, profit-sharing plan. To have a solo 401(k), you must either be the lone worker at your business or its only full-time employee.1  

Boost your retirement savings strategy. With a solo 401(k), you may be able to ramp up your retirement savings and manage your tax bill at the same time. Remember, distributions from 401(k) plans are taxed as ordinary income, and if taken before age 59½, may be subject to a 10% federal income tax penalty. Generally, once you reach age 72, you must begin taking distributions. 

As an employee, you can defer up to $19,500 of your compensation into a solo 401(k) in 2020. Since catch-up contributions are allowed for the Solo 401(k), the yearly limit is $26,000 if you are 50 or older.2

As an employer, the maximum amount a self-employed individual can contribute to a solo 401(k) for 2020 is $57,000, if they are younger than age 50. Individuals 50 and older can add an extra $6,500 per year in "catch-up" contributions, bringing the total to $63,500. Whether you're permitted to contribute the maximum, though, is based on a variety of factors, including your self-employment income.3  

Are you married? If your spouse earns income from the business, then they can potentially make an employee contribution to the plan.4                 

You can “go Roth” with your solo 401(k). The annual employee contribution limits for a Roth solo 401(k) are the same as those for a traditional 401(k): $19,500 for individuals under 50, and $26,000 for individuals 50 or older. Only employee contributions can be Roth contributions, however.

The administration duties for a solo 401(k) plan may be relatively light. There are no compliance testing requirements. You need to file an annual Form 5500 with the I.R.S. when the assets in your solo 401(k) exceed $250,000.5

Solo 401(k)s give the small-business owner increased retirement savings potential. These plans are relatively easy to create, and you are free to have one whether your business is a sole proprietorship, S corporation, C corporation, or limited liability company (LLC).

Michael S. Wallman may be reached at 407.470.8889 / 305.720.6739 or mwallman@wallmanfinancial.com.

www.wallmanfinancial.com 

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Citations.

1 - irs.gov/retirement-plans/one-participant-401k-plans [12/04/19]

2 - irs.gov/retirement-plans/one-participant-401k-plans [12/04/19]

3 - kiplinger.com/article/retirement/T001-C000-S001-how-much-can-you-contribute-to-a-solo-401-k-2020 [01/10/20]

4 - irs.gov/retirement-plans/one-participant-401k-plans [12/04/19]

5 - nerdwallet.com/blog/investing/what-is-a-solo-401k/ [02/07/20]