Savings Incentive Match Plan For Employees
You can put all your net earnings from self-employment in the plan: up to $13,500 in 2021 and in 2020 , plus an additional $3,000 if you’re 50 or older , plus either a 2% fixed contribution or a 3% matching contribution.
Establish the plan:
Can My Spouse Participate In My Solo 401
Dylan Telerski / 10 Dec 2020 / Business
One of the benefits of a Solo 401 is that your spouse can also participate in the plan. If you both take taxable income from the same sole proprietorship, your spouse can make equal contributions.
A Solo 401 is designed for a business owner with NO employees. However, you may add a spouse to your plan as an exception to the rule. You may also employ:
- 1099 contractors
- Nonresident aliens, and
- Part-time workers who put in less than 1,000 hours per year
If you plan to hire full-time W2 employees, you will need to stop making contributions and rollover your self-directed Solo 401 to a self-directed IRA or small business 401k within a year.
Can You Have Multiple 401ks
Here’s the deal. Many physicians work for multiple employers or work as an employee and either an independent contractor or a consultant. Many others have a side job of another type. Their incomes are far higher than they require for their current spending needs, but they’re behind on their savings or otherwise have a desire to maximize the amount of money they can put into retirement accounts, especially tax-deferred retirement accounts.
Obviously, these types of accounts minimize tax, maximize returns, increase asset protection, and facilitate estate planning. Who wouldn’t want to get more money into them? However, most of these doctors are surprised to learn that they can have more than one 401. That’s right,
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Determining Compensation For Self
The starting point for identifying compensation for contribution purposes on behalf of self-employed individuals is to determine the individuals earned income or net earnings from self-employment. Depending on the individuals type of self-employment, an individual will use one of the following forms to determine net earnings for a specific year.
- A partnership generates a Schedule K-1, Partners Share of Income, Deductions, Credits, etc., for each individual partner showing the partners net earnings for the year.
- A sole proprietor must file Schedule C, Profit or Loss From Business, showing the net earnings from the business for the year.
- Farmers file Schedule F, Profit or Loss From Farming, to show net income from farming.
Possible Drawbacks To Consider:
- Administration and reporting. Unlike the which is not subject to annual IRS filings, annual reporting is required for Individual 401 plans through Form 5500 once the accumulated funds reach $250,000
- No employees allowed. Except for a spouse, Solo 401 plans do not allow any other employees of the business
- More restrictive timelines to set up and fund. Compared to the SEP IRA, the Solo 401 offers less flexibility for business owners to set up and fund. Plans must be set up by December 31st or the last day which the plan year is effective, if different. Unincorporated businesses must fund their plan by the corporate tax return deadline, including extensions. Individual elective deferrals must be declared by December 31st even though funding can be postponed. Incorporated businesses may also wait until the tax filing deadline, including extensions, for the employer contribution. However, employee deferrals must be made within 7 days of electing the contribution. To avoid issues, annual employee contributions should be completed in advance of the December 31st
Business Owners: Its Not Too Late to Lower Your Taxable Income for the Year
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Who Should Choose A Solo 401 Instead Of A Sep Ira
The conventional wisdom regarding the Solo 401 vs SEP IRA question is that self-employed people should choose the Solo 401 because in most cases, the potential tax savings are higher.
The primary question many taxpayers ask when deciding between a SEP and a Solo 401 is What is the maximum I can contribute? In most cases, the Solo 401K allows for a greater contribution and tax deduction, especially in cases where the individuals self-employment income is limited, says Dave Cherill, a certified public accountant and member of the American Institute of CPAs Personal Financial Planning Executive Committee.
But thats not the only reason to pick a Solo 401. Solo 401s also offer features more on par with other employer-sponsored retirement plans that SEP IRAs lack: You can, for example, generally take out a loan from your Solo 401 equal to the lesser of $50,000 or 50% of your account balance. Solo 401s also offer catch-up contributions for people 50 and older as well as a Roth option, which lets you pay income tax now in exchange for tax-free withdrawals in retirement.
I would say that the biggest benefit of all is the Roth option, says Desmond Henry, a certified financial planner based in Topeka, Kan. For someone who is a high earner, the Solo makes sense because of the Roth option.
What Is A Roth Ira
A Roth IRA is a personal savings plan that gives you tax advantages for setting aside money for retirement. The 2020 Roth IRA contribution limit is $6,000 and $7,000 for those age 50 or older.
A Roth IRA offers some unique tax advantages compared to other retirement accounts since contributions are not tax deductible, but withdrawals after age 59 ½ are tax free. Some of the investments that may be selected inside a Roth IRA are mutual funds, stocks, bonds and CDs.
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Contributions Are Discretionary Loans Are Allowed
Individual 401 contributions are not mandatory every year. This allows sole proprietors to manage their cash flows and contribute the maximum amount in good years while contributing less or nothing at all if their business takes a turn for the worse. In addition, owners can take loans for as much as $50,000 or 50% of the value of the benefits in the plan .
Although the SEP IRA doesn’t require mandatory contributions, it has no such loan provisions. The ability to take a tax-free loan from your individual 401 in the case of an emergency should be taken seriously because sole proprietors often have variable incomes from year to year.
Can I Contribute To Solo 401k If My Net Self
If you have a net loss from your self-employed income, you would not be eligible to contribute. The IRS rules state that you are allowed to contribute a maximum of 25% of your profit from net earnings from self-employment income.
The allowable deduction is based on your self-employment tax. If you have a net loss there would be no self-employment tax and therefore no basis to calculate your deduction.
For more information please see the link below.
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Learn More About The Benefits Of The Solo 401k
- Solo 401k Information, Rules and Frequently Asked Questions about the Solo 401k.
- Solo 401k Eligibility Learn about the eligibility rules and find out who is eligible and who is ineligible to establish a Solo 401k plan.
- Solo 401k Loan A 401k loan up 50% of the total value of the 401k up to a maximum loan of $50,000 is permitted with a Solo 401k plan.
- Solo Roth 401k There is an option to make Roth 401k contributions with the salary deferral portion of the Solo 401k. Contributions into a Roth 401k are not tax deductible, but withdrawals are tax free after age 59 ½.
- Solo 401k Rollover You can rollover your 401k, 403b, 457, TSP and Defined Benefit Plan from a previous employer. You can also rollover a Traditional IRA, SEP IRA, Rollover IRA, SIMPLE IRA and Keogh plan.
- Solo 401k Providers Learn about the 3 main types of Solo 401k providers and the investment options available with each Solo 401k provider.
- Self Employed Retirement Plan Comparison Compare the Solo 401k, SEP IRA, Defined Benefit Plan and Simple IRA.
K For Sole Proprietors
In the U.S., many employers offer 401K plans, but until recently, a sole proprietor could not set up their own tax deferred plan without a fair amount of complication and paperwork. That’s changed, but there are still many resources on the web that will tell you that you can’t have a 401K without incorporating. You can.
There are two basic plans: SEP and Solo 401K. These are very similar. SEP allows employees the other does not .
You may be able to contribute as much as $49,000 a year to this kind of plan. There are potential negatives: if you plan on hiring employees later, you will want to think carefully about this because you’ll be required to expand this to include the employees. Of course anything like this should be discussed with your tax advisors before jumping in. However, if the plan fits, this is a simple way for the unincorporated sole proprietor to put aside tax deferred money. The intention of the law was probably to encourage profit sharing as it doesn’t exclude those of us with no employees, we benefit by being able to defer larger amounts than we could with IRA’s.
In 2010 and 2011, you might be able to sock away as much as $54,500 . It’s limited to 25% of income , though, so you’d have to be doing pretty well to reach that limit.
The other important thing is that you aren’t locked into any particular amount – even if you have employees. You decide each year how much to contribute and that can be a nice round figure of zero if you’ve had a bad year.
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Can I Have A Solo 401k And A Regular 401k
Another frequently asked question that comes up a lot is whether its possible to have a Solo 401k and also have a group 401k plan with your employer. It is possible to have both. Let me tell you how. As long as your employer is offering a 401k plan, you can participate by making employee salary deferrals. This is generally limited to $19,500 or $26,000 if you are age 50 or older.
Now, lets imagine a scenario where you also have a side business or side hustle. You are earning 1099 income driving for Uber on the weekends. You set up a Solo 401k to make additional contributions from your 1099 income to save more for retirement. Keep in mind, the salary deferrals you made at your W2 job follow you. They are aggregated across all 401k plans where you are a participant. So if you maxed out your salary deferral at your job, you cannot put anymore salary deferrals into the Solo 401k.
You can, however, contribute as the employer in the form of a profit sharing contribution which is 20% of your net income from those 1099s. You can also make after-tax contributions, which can be converted into Roth
What Is The Deadline For Funding An Owners
The deadline for funding the employer contribution to an owners-only 401 is the business tax filing deadline, including extensions. The deadline for depositing salary deferral contributions is the earliest date on which the deferral can be reasonably segregated from the general assets of the business, but no later than the 15th business day of the month following the deferral.
The U.S. Department of Labor has proposed a new regulation for plans that provides a seven-day safe harbor for depositing salary deferral contributions to a plan. As long as the contributions are transmitted within seven business days after the amounts would have been paid to the employee, the contributions would be considered timely.
Due to final 401 regulations issued in 2006, an owner of an unincorporated business can postpone the deposit of a deferral until the tax filing date, provided the deferral election is made by the end of the tax year . For sole proprietors, compensation is deemed to be earned on the last day of the tax year. That means the election to defer must be made by that date, since an election to defer can never be made retroactively. However, the deposit can be made up until the tax filing deadline, including extensions.
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Who Qualifies For A Solo 401 Plan
A Solo 401 plan is an employer sponsored retirement savings plan that is designed specifically for owner-only businesses. The lack of non-owner employees greatly simplifies the administration of the plan, and is a key part of what makes the Safeguard Solo 401 a great self-directed investing platform.
Many kinds of businesses can act as a plan sponsor, including those established as a sole proprietorship, LLC, partnership, or corporation. The enterprise needs to be engaging in a trade or business, with the intent to generate a profit, and have the potential to make future contributions to the plan.
- Professional service providers such as Attorneys, CPAs, Architects and Medical Practitioners
- Financial Advisors & CFPs
- Internet based sales or services businesses
- Physical Fitness Trainers, Coaches or Therapists
- Child or Adult Care Providers
- And many, many more.
Only active business endeavors such a providing a product or service are eligible. Passive earnings such as rental income or K-1 distributions are not viewed as wages, compensation, or self-employment income, and therefore cannot be used to make 401 contributions.
Solo 401k Rules & Contribution Limits
Contribution Limits for the Solo 401k are very high! So you definitely want to follow the rules to get the most out of your contributions. For 2021 the max contribution is $58,000 and $64,500 if you are 50 years old or older. For Solo 401k, the contributions have to come from your sponsoring business. They cant come from your W2 job, pensions, rental income, or other sources not considered to be self employment income
Whats great is that you can contribute pre-tax/traditional and lower your taxable income. Or you can contribute after-tax to Roth, so your distributions later in retirement are tax-free. You can also do a combination of both traditional and Roth
There are many ways to contribute to a Solo 401k because you play multiple roles in the plan. You are the employee. So you can do employee salary deferrals up to $19,500 and $26,000 if you are 50 years old or older. This can be up to 100% of your net compensation or W2 depending on your business structure. This employee salary deferral can be pre-tax or Roth or a combination of both. You are also the employer. So you can do 20-25% as a employer profit sharing contribution depending on your business structure. 20% is for sole proprietors and single member LLCs. 25% is for S Corp, C Corp and partnerships. These contributions are always tax deductible.
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Solo 401 Vs Sep Ira Contribution Example
Consider John Smith who, in addition to his regular corporate salary, earns $150,000 of consulting income. The consulting income is earned and paid to his business, John Smith LLC, which files as a sole proprietorship. John wants to save more dollars from this consulting income in a tax-advantaged way. The below compares the total contribution possible with an SEP IRA vs. a Solo 401 plan:
Why Does A Sole Proprietor Need To Get An Ein
In most cases, a sole proprietor does not need to get an EIN. Usually, it is totally acceptable for a sole proprietor to use his or her social security number in the place of any other tax identification number.
However, there are some times when a separate number is necessary. In fact, in some instances, having a separate EIN for ones business may even be preferable. Read on to get a rundown of when having a separate EIN is required and makes sense for your sole proprietorship.
When It Is Required
A sole proprietor must get a separate EIN for a business if any one of these things are true:
- That individual wants to hire employees, wants to open a Keogh or solo 401, or chooses to file for bankruptcy protection.
- When that individual plans to purchase an existing business and operate it as a sole proprietorship
- When a partnership or limited liability corporation is formed, or incorporated.
Finally, while not required by the federal government, some banks will not allow you to open a bank account in your business name if you do not have a separate EIN.
When It May Be Preferable
No matter where your sole proprietorship falls on this scale, you can find everything you need to get your status set at www.irs-ein-tax-id.com.
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Solo 401k Rules For Sole Proprietor
Being a sole proprietor is the simplest and easiest way to start out in business. You typically do business under your personal name or you could have a DBA name. Most of the rules for a sole proprietorship are similar to any other business structure, except for a few main areas
When calculating contributions from your sole proprietorship you get to use net business income. Your salary deferral can be up to $19,500 or $26,000 if you are 50 years of age or older. This can be up to 100% of your net business income. Your employer profit sharing contribution is a little bit more complex to calculate. You can look at IRS publication 560 which has a deduction worksheet for self employed in chapter 6. This worksheet helps you calculate your employer profit sharing contribution. Its generally about 20% of your net business income minus half of your self employment income tax. You should work with a qualified tax professional to finalize your numbers. To get an estimate you can also use this Solo 401k calculator.
Your sole proprietorship contributions need to be made before your tax filing deadline. April 15 is the deadline for normal filing. If you file an extension you can make contributions all the way until October 15th. Put your tax deductible contributions on IRS Form 1040, Schedule 1, Line 15. You can write the check to make your contributions from your business checking account and deposit it into your Solo 401k Trust bank or brokerage account.