I Participate In A 401k Through My Primary Employer And I Have A Part Time Business Can I Have A Solo 401k For My Part Time Business
Yes. You are eligible to establish a Solo 401k for a side business even if you participate in a 401k, 403b, 457 or Thrift Savings Plan through your primary employer. It is important to note that contributions made to the employers 401k, 403b or Thrift Savings Plan will impact the contributions for the Solo 401k. Contributions to the employers 401k, 403b or TSP count towards the Solo 401k salary deferral limit. The 2021 salary deferral limit is $19,500 and $26,000 if age 50 or older. Contributions made into a 457 plan do not count towards the salary deferral limit. In addition to a salary deferral contribution, a business owner can also make contributions to the profit sharing portion of a Solo 401k.
Example: Jennifer is age 40 and works as a W-2 employee for ABC accounting firm and contributes $10,000 to the 401k. In addition to working at the accounting firm, Jennifer is the owner of an S corporation. She is the only employee and pays herself a $100,000 W-2 salary in 2021.
Based on this information Jennifer would be eligible to make a contribution of $9,500 in salary deferrals plus make a profit sharing contribution of $25,000 for a total of $34,500 in Solo 401k contributions in 2021.
Who Is Eligible For A Solo 401k
Lets start with one of the most basic solo 401k rules: eligibility. You are eligible for a solo 401k if you are self-employed and do not have any employees. This applies to self-employed small business owners, freelancers, 1099 contractors, and solopreneurs.
The most important qualification is that you do not have any employees. However, solo 401ks are unique in that you can cover your spouse if they are drawing income from your business. Your spouse is the only employee that could potentially qualify under your solo 401k plan.
Administering A Solo 401 Plan
Once your Solo 401 plan exceeds $250,000 in assets at the end of the year, the IRS requires you file an annual Form 5500 EZ. Or if you ever terminate the plan, you must also file a Form 5500 EZ.
Unlike Traditional 401 plans, there are no compliance testing requirements to ensure Solo 401 plans do not favor highly compensated employees and are non-discriminatory, as long as you have no employees participating in the plan.
These plans can be called Self-Directed 401, Individual 401, Individual Roth 401, Self-Employed 401, Personal 401 or One-Participant 401 depending upon the vendor offering the plan services.
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How To Open A Solo 401k
You need an Employer Identification Number and earned income verified by the IRS, but a solo 401k is easy to open. They are offered by most online brokers.
How Much Can I Contribute To A Solo 401
There are two types of contributions that can be made:
It is important to consult your accountant to calculate the profit-sharing contribution if you plan to open and contribute to a Solo 401.
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Maximum Contributions Across Sep Ira And Solo 401k
Because employees do not make personal contributions to a SEP IRA, you can make the maximum employee contribution to your Solo 401k. The maximum employer contribution can also be made to both the SEP IRA and the Solo 401k. Thats because the maximum is per employer plan.
Keep in mind that 50 catch up contributions do not apply to the employer portion of either plan.
For 2021, you can make a maximum Solo 401k employee contribution up to $19,500. That number increases to $26,000 if you are age 50 or older. The maximum employer Solo 401k contribution can be $38,500 for a total of $58,000. The all-inclusive total can be $64,500 per year if you are age 50 or older.
As long as your SEP IRA contributions are from a different employer, the maximum employer contribution to the SEP IRA can also be $58,000.
A Solo 401k PLUS a SEP IRA total tax-deferred contribution could be as high as $116,000 or $ 122,500 if you are age 50 or older.
However, there are some percentages of earnings calculations that go into the overall equation
How To Open A Solo 401
You can open a solo 401 at most online brokers, though youll need an Employer Identification Number. The broker will provide a plan adoption agreement for you to complete, as well as an account application. Once youve done that, you can set up contributions. Youll have access to many of the investments offered by your broker, including mutual funds, index funds, exchange-traded funds, individual stocks and bonds.
If you want to make a contribution for this year, you must establish the plan by Dec. 31 and make your employee contribution by the end of the calendar year. You can typically make employer profit-sharing contributions until your tax-filing deadline for the tax year.
Note that once the plan gets rocking, it may require some additional paperwork the IRS requires an annual report on Form 5500-SF if your 401 plan has $250,000 or more in assets at the end of a given year.
If you need help managing the funds in your solo 401, robo-advisor Blooom will manage your 401 at your existing provider. If you want even more comprehensive financial help, you might opt for an online planning service. Companies such as Facet Wealth and Personal Capital offer low-cost access to human advisors and provide holistic guidance on your finances, including how to invest your 401.
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Solo 401k Plan For A Sole Proprietor
QUESTION 2: Can a sole proprietor open a solo 401k plan?
ANSWER: Yes a sole proprietorship can also sponsor a solo 401k plan. A sole proprietor files a Schedule C to report the self-employment activity. We would list your name as the self-employed business on the solo 401k plan documents, and your contributions to the solo 401k plan would be based on line 31 of the Schedule C.
Best For Low Fees: Charles Schwab
The Individual 401 Plan from Charles Schwab is our top choice for low fees. The account has no opening or maintenance fees as well as no commission trades for stocks or ETFs and over 4,000 no-load, no-transaction-fee mutual funds. Customers can also use its robo-advisor, Schwab Intelligent Portfolios, with no extra fees.
Accounts are free to open and charge no recurring fees
Access to trade stocks, ETFs, and thousands of mutual funds for free
Option for a no-cost robo-advisor
No solo 401 loans
High fees for some mutual fund trades and broker-assisted trades
Charles Schwab is our top choice for low fees in a solo 401 plan. Schwabs version charges no recurring fees and no setup fees. It offers commission-free trades for all stocks and ETFs as well as over 4,200 no-transaction-fee funds on the Schwab OneSource funds list. While Schwab offers excellent customer service, be aware that automated phone trades cost $5 and broker-assisted trades cost $25 each. However, many customers could use this account without paying any fees.
Schwabs Solo 401 doesnt offer 401 loans. Its active investment platform may not satiate all expert investors, and its active charting and analysis tools lag behind some other brokerage platforms for active traders. However, the pending integration of TD Ameritrade will bring the coveted thinkorswim® platform under the Schwab umbrella, which is something active traders at Schwab can look forward to.
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What Are The Irs Rules About How Much And When The Business Owner Must Make Contributions To A Solo 401k
The intent of the business owner must be to make significant contributions to the Solo 401k plan, however there are no established thresholds regarding how much money is required to be contributed annually. Also there are no IRS rules about how soon contributions must be made after establishing a Solo 401k plan.
What Are The Ways To Contribute To Self
You can contribute to an individual 401 account as an employee and an employer. As an employee, the solo 401 limits for 2020 allow you to contribute the lesser of either $19,500 or 100% of your income. Participants who are 50 years and older can increase their contributions by $6,500 each year for a total of $26,000.
As an employer, the 2020 guidelines permit you to contribute up to 25% of your annual compensation, and up to a maximum of $57,000 in combined contributions per year. For 2020, the IRS limits the self-employed 401 contribution of participants 50 years and older to $63,500.
A solo 401 plan offers tax breaks if you are eligible. You can deduct the contributions from your personal income if you did not incorporate the business. If you run a corporation, you can classify the contributions as a business expense.
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Best For Account Features: E*trade
E*TRADE gives you more flexibility with its solo 401 offering. E*TRADE supports both traditional individual 401 plans and Roth 401 plans. You are also able to take out a loan on your 401 balance at E*TRADE, all of which makes E*TRADE best in our review for account features.
Choose between traditional or Roth 401 contributions
Support for 401 loans
No recurring account fees, and commission-free stock and ETF trades
Now run by Morgan Stanley, meaning changes are likely
High fee for broker-assisted trades and some mutual fund trades
E*TRADE has a long history of supporting online investors, with its first online trade placed in 1983. It is now a subsidiary of Morgan Stanley after an acquisition that closed in October 2020. At E*TRADE, you can choose between traditional and Roth individual 401 plans, which allows you to choose between pre-tax and post-tax contributions. You can also take a 401 loan from an individual 401 account at E*TRADE.
There are no listed fees to open or keep a solo 401 account at E*TRADE. Stock and ETF trades are commission free. The brokerage also supports over 7,000 mutual funds on its no-load, no-transaction-fee list. E*TRADE supports options, futures, and fixed-income bonds and CDs, as well.
Read our full E*TRADE review.
Multiple 401 Rules What To Do With Multiple 401k Accounts
I first wrote about multiple 401 accounts back in 2013 in a post entitled Beating the $51K Limit . Well, the $51K limit has since grown into the $58K limit in 2021 thanks to inflation, but all the same principles still apply.
I get tons of questions on multiple employer 401 in our Forum, Podcast, , and Reddit groups, in the comments sections of the posts on this site, and by email. Heck, this post already has over 1,000 comments! Mostly, I wrote this post so I could copy and paste its URL instead of typing the same old stuff over and over again.
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Drawbacks To The Solo 401
The solo 401 has the same drawbacks of typical 401 plans, plus a couple others that are specific to itself. Like other 401 plans, the solo 401 will hit you with taxes and penalties if you withdraw the money before retirement age, currently set at 59½. Yes, you can take out a loan or may be able to access a hardship withdrawal, if needed, but those are last resorts.
In addition, it can take more paperwork to open a solo 401, but its not especially onerous. You usually wont be able to open the account completely online in 15 minutes, as you would a typical brokerage account. Plus, youll need to get a tax ID from the IRS, which you can do online quickly. On top of this, youll have to manage the plan, choose investments and ensure that you dont exceed annual contribution limits.
Another wrinkle: Once you exceed $250,000 in assets in the plan at the end of the year, youll need to start filing a special form with the IRS each year.
These drawbacks arent especially burdensome, but you should be aware of them.
A Deeper Look At The Limitations And Requirements
To qualify for a SEP IRA, you must meet the following:
- Be at least 21 years old,
- Have worked at the business for three of the past five years, and
- Have earned at least $600 from the job in the past year.
Your SEP IRA contribution each year cannot exceed the lesser of 25% of your compensation or $58,000 for 2021. The maximum amount of self-employment compensation that applies for 2021 is $285,000. For self-employed individuals, the amount of compensation used for these purposes is your net earnings from self-employment less the deductible portion of self-employment tax, and the amount of your own retirement plan contribution deducted on form 1040.
For a Solo 401k plan, the 2021 limit is $19,500, plus a $6,500 catch-up contribution for those individuals over age 50. That contribution amount is up to 100% of your compensation. The employer profit-sharing contribution does not count toward this limit. However, the total contribution limit of both the employer and employee in 2021 is $58,000. If you are age 50 or older, the limit is $64,500.
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Solo 401 Plan Individual 401k For The Self
Advertiser Disclosure: Opinions, reviews, analyses & recommendations are the authors alone. This article may contain links from our advertisers. For more information, please see our .
This article is part of a series on self-employed retirement plans, and was written by Robert D. Flach. Robert has been preparing business and individual tax returns for people in all walks of life since 1972. He writes the tax blogs THE WANDERING TAX PRO.
Article assumptions: Self-employed individuals have many types of retirement plans from which to choose. While these plans are available regardless of the type of business entity chosen, I will be discussing them from the point of view of the Schedule C filer. In such a situation the determination of the amount of the allowable contribution begins with the net profit reported on Line 31 of Schedule C or Line 3 of Schedule C-EZ.
All of the retirement plans that I will discuss are available to the one-man business with no employees, and I will limit my discussion to the contributions of the business owner. However these plans will require coverage of any qualifying W-2 employees of the business, and special rules will apply to contributions for employees.
Can I Keep My Solo 401 If I Hire An Employee
If the business sponsoring your Solo 401 hires any full-time employees or long-term part-time employees, or if any other business you control has plan-eligible employees, then those employees are entitled by law to benefits coverage under the 401 plan.
Once a 401 has non-owner employees, its no longer the simplified Solo 401 version of the plan.
So what does that mean for your plan?
Theres no need to panic: Your plan can exclude a qualifying employee for up to one year of service, so you have time to create a proper transition strategy.
There are two directions you can take your plan:
Lets look at the pros and cons of each option below:
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Rule # 4 You Only Get One Sep Simple Or 401 Per Unrelated Employer Per Year
Each unrelated employer should only have one of these three types of accounts for each tax year. However, you could open a SEP-IRA for your self-employment income in March 2021 for tax year 2020, and then open an individual 401 in June 2021 for tax year 2021 if you like. Remember that just because you are the sole owner of two separate businesses doesn’t mean you get two different retirement accounts. Those businesses are a controlled group.
Round #3 When Is The Contribution Deadline For Solo 401 And Sep Ira
For 2020, the contribution deadline for the Solo 401 as well as the contribution deadline for the SEP IRA has been extended to May 17, 2021. This deadline is specifically for the employer contributions.
If youre setting up a solo 401 just now for the tax year 2020, you cannot contribute as an employee, unfortunately. But you can do so for the tax year 2021. The takeaway is you still have time to create and put in money to either a solo 401 or a SEP IRA, as the Employer. Make sure you do this before the deadline. Take a break from uploading your TikTok video for a day!
Round 3 Winner: Its a tie. The Solo 401 contribution deadline and SEP IRA contribution deadline are the same.
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