Understand The Eligibility Requirements For A Solo 401
Because IRS regulations say Solo 401 plans can only have one participant, these plans are only appropriate for self-employed individuals and small business owners who have no full-time employees. Solo 401 plans will require a plan administrator, also known as an investment provider, wholl help ensure regulatory paperwork is completed. If you plan to hire full-time employees in the future, a Solo 401 plan can convert easily to accommodate additional full-time employees within the companys 401 plan.
An alternative to the Solo 401 is the simplified employee pension individual retirement account . While both plans allow you to contribute a maximum of $58,000 each year, the SEP-IRA only allows you to contribute up to 25% of your income or $58,000, whichever is less. Also, if you have a SEP-IRA and hire additional full-time staff, you are required to make contributions for those employees whenever you make contributions for yourself. That said, a SEP-IRA can be rolled over to a new 401 plan, whether it be solo or traditional, should you unexpectedly need to hire staff.
Solo And 401 Rules When You Have Employees And Multiple Businesses
A 401 is a great benefit normally associated with large companies where the employee makes contributions and the employer offers a match. The contribution limits are high and can allow for significant tax deferral on the income you earn each year. What a lot of people may not know is that you dont have to be a large company to have a 401 plan. In fact, you can be the only employee in your own business and have a retirement plan.
If it is just you in your business, your company can start a retirement plan known as a solo 401. The solo 401 allows you to adopt a retirement plan and make personal as well as company contributions to the plan for yourself and any of the owners of the company.
- You must have a business generating ordinary income to make to have a 401 plan.
- You can personally contribute up to $19,000 to the plan.
- Your company can contribute up to 25% of the income it pays you.
- For 2019 the total max 401 contribution is $56,000.
The 401 plan can be self-directed, which means you can invest the funds in almost any opportunity you find . The 401 also has a loan provision allowing you to borrow funds from the plan and use them for anything you want.
What If I have Multiple Businesses With Only Employees in Some?
Controlled Group Rules
| 100% |
How A Solo 401 Works
Solo 401s are available only to self-employed workers with no employees, with an exception for business owners who employ their spouses. To open one of these accounts, you must have an employer identification number , which you can get from the U.S. Internal Revenue Service .
You’re allowed to make two types of contribution to your solo 401: an employee contribution and an employer contribution. Your employee contribution limit is the same as the 401 contribution limit for any traditionally employed worker — $19,500 in 2021, or $26,000 if you’re 50 or older.
If you’d like to contribute more than this, you can make additional contributions as an employer, but this calculation is a little more complicated. You may contribute up to 25% of your net self-employment income for the year. That is all the money you’ve earned from your business minus any business expenses, half of your self-employment taxes, and the money you contributed to your solo 401 as an employee contribution.
Only the first $290,000 in net self-employment income counts for the year, and the total amount you may contribute to your solo 401 as employee and employer in 2021 is $58,000, or $64,500 if you’re 50 or older.
If you find yourself in need of cash later on, you can take a loan from your solo 401 just as you can from a traditional 401. Typically, you’re limited to the lesser of 50% of your balance or $50,000, but the government has doubled these limits in 2020 to help those affected by the pandemic.
Don’t Miss: What Is The 401k Retirement Plan
Transfer Retirement Funds To Solo 401
When you choose your solo 401 provider and you set up your IRS compliant Solo 401k plan, transfer your retirement funds from your current custodian to a financial institution or credit union that can serve as your custodian. There is no fee, and the transfer is also tax-free.
Make a tax-free direct rollover to your new Solo 401k plan bank account. You can contact the specialists at IRA Financial Group can assist you in completing this step in setting up your Solo 401. We will expedite the process in a tax-free manner.
Find A Solo 401 Provider
Finding a provider to administer your Solo 401 is arguably the most important step in the process. Most people who want to set up a Solo 401 look for a simple, straightforward, and affordable plan. However, remember that these plans are all about your future individual goals and business plansyou want to ensure that your provider can help you with those.
When you start looking for a Solo 401 provider, its important to consider these three things:
- Costs: Many Solo 401 plans charge manageable and competitive fees
- Level of management: Not all providers will actively administer Solo 401 plans from the standpoint of annual regulatory and compliance filings some will provide you with the information thats needed to report at no cost but leave the responsibility for filing to you while other providers will offer more hands-on management for a monthly or annual fee
- Investment flexibility: Be sure to choose a provider thatll give you access to the investment options you want, in alignment with your financial needs
If you already have an investment account or IRA plan, you can ask your current advisor if they also offer a Solo 401. If your advisor is unable to help, make sure you shop around and choose a reputable company. Weve researched the best Solo 401 providers to help you in that process. These providers will offer a mix of quality services at affordable costs.
Don’t Miss: How Do I Get A Loan From My 401k
Should You Do A Roth Solo 401k
One of the options that’s become important is allowing for a Roth solo 401k. Surprisingly, many brokerage firms currently don’t allow a Roth solo 401k, but it can be a valuable option.
When it comes to your solo 401k, it’s important to remember that you have two aspects of contributions to your plan:
Where a Roth option comes in handy is if you’re looking for tax diversification. With Roth contributions, you are using post-tax money. So, you will pay more in taxes today, but you will pay less in the future. However, if you’re putting in large profit sharing contributions into your solo 401k, then it might make sense to make Roth contributions.
The reason? It will give you tax diversification in retirement. You can choose whether you use taxable or tax free money in the future – and options are always great.
The important thing to remember here is options. You just want the options to be able to invest how you choose.
Who Is Eligible For A Solo 401
Solo 401 plans are intended for the self-employed. If you have employees and are looking for a retirement plan, then you have other options such as the or SIMPLE IRA, both of which allow you to provide tax-advantaged benefits to your employees. A lesser-known program called a SIMPLE 401 also allows businesses to set up retirement plans.
While solo 401 plans are intended for one-person businesses, there is an exception. The spouse of the business owner can also participate in the plan. With a spouse in the plan, your small business can really stash away cash for retirement. A qualifying couple could save as much as $114,000 annually in the plan, and even more if they were eligible for catch-up contributions.
Read Also: How To Transfer 401k Without Penalty
Do I Need A 401 Solo Plan
For sole proprietorship businesses, solo 401 plans are very effective ways to set aside and grow a large amount of money for retirement. If you’re a small business owner and don’t yet have a retirement plan set up, a solo 401 is an excellent way to save for retirement.
If you happen to need to hire employees at some time during your business’s lifetime, you’ll need to be sure to adjust the plan to include them equally or create criteria to define benefit-eligible employees and create retirement plans for them.
How To Include Your Spouse In Your Solo 401
If youre a sole proprietorship, your spouse will receive a W2 as an employee. This solution is best if the spouse has minimal duties in the business.
You can also choose to file as a partnership, where each partner receives a K-1 . The partnership bypasses income taxes, passing profits and losses onto each partner. The IRS views this structure as ideal if both partners contribute materially to the business.
A Qualified Joint Venture may be possible if both spouses work and contribute materially to the business and file a joint tax return. Each spouse reports income gains, losses, deductions, and credits separately on Form 1040 Schedule C.
Spouses can also form LLCs, and C or S corporations.
If you have any additional questions about starting a new Solo 401 or adding a spouse to an existing Solo 401, dont hesitate to contact Ubiquity.
Are you ready to retire?
Read Also: Should You Move Your 401k To An Ira
Traditional Or Roth Ira
If none of the above plans seems a good fit, you can start your own individual IRA. Both Roth and traditional individual retirement accounts are available to anyone with employment income, and that includes freelancers. Roth IRAs let you contribute after-tax dollars, while traditional IRAs let you contribute pretax dollars. In 2021, the maximum annual contribution is $6,000, $7,000 if you are age 50 or older, or your total earned income, whichever is less.
Most freelancers work for someone else before striking out on their own. If you had a retirement plan such as a 401, 403, or 457 with a former employer, the best way to manage the accumulated savings is often to transfer them to a rollover IRA or, alternatively, a one-participant 401.
Rolling over allows you to choose how to invest the money, rather than being limited by the choices in an employer-sponsored plan. Also, the transferred sum can jump-start you into saving in your new entrepreneurial career.
Choose The Right Provider
With your provider, its important to ask questions. Two common questions people ask are how to make contributions with the Solo 401, and how to use the Solo 401 loan.
However, tailor your questions to your specific needs. At IRA Financial Group, you can call at 401 specialist for a free consultation. With the 401 specialist, you can answer any questions you may have regarding the Solo 401 retirement plan.
You have a few options when choosing a provider to set up a Solo 401k plan. Here are the three options you have to easily set up a Solo 401.
Also Check: Can You Roll Over 401k To New Employer
Find Out When And How To File Irs Form 550 For Your Solo 401 Plan
By Stephen Fishman, J.D.
A solo 401 ) is a 401 retirement plan designed specifically for self-employed people with one-owner businesses. It covers only you . You can set up a solo 401 whether your business is incorporated or a sole proprietorship. Partners in a partnership can also establish these plans for themselves. Solo 401s are a great retirement option for self-employed people because the money you contribute each year is tax deductible, and you can make substantial annual deductible contributions: as much as 20% of your net profit from self-employment plus an annual deferral contribution of up to $18,000 , up to an annual maximum of $53,000 . Plus you can add an additional $6,000 annual catch-up contribution if you’re over 50 years of age.
You can set up a solo 401 plan at most banks, brokerage houses, mutual funds, and other financial institutions and invest the money in a variety of ways. You must adopt a written plan and set up a trust or custodial account with your plan provider to invest your funds. Financial institutions that offer solo 401 plans have preapproved ready-made plans that you can use.
If your solo 401 is worth more than $250,000, you can have your plan administrator or CPA make the required filing. However, they will ordinarily charge you for this serviceoften as much as $200. You can easily do this very simple tax filing yourself and save the money.
There are two ways to file:
- electronically, by filing IRS Form 5500-SF.
What To Look For In A Solo 401k
Going through the process of shopping around for a solo 401k provider, I’ve learned a lot about what to look for. There are a lot of options and nuances that you should look for when shopping for a 401k. Many of the “free” providers offer simple generic plans, and if those don’t work for you, you can have a third party provider create a custom 401k plan for your business, which you can then take to a brokerage.
Whoa, that sounds confusing, and it can be. So let’s look at the major options that you need to consider when selecting a solo 401k provider.
- Does the 401k provider offer both Roth and Traditional contributions?
- Does the 401k provider offer after-tax contributions to do a mega backdoor Roth IRA.
- Does the 401k provider offer loans from the plan?
- What types of investment options are allowed in the plan?
- Does the provider allow rollovers into the plan and rollovers out of the plan?
- The costs to maintain the plan
- The costs to invest within the plan
Based on your wants and needs, there are a lot of things to compare when shopping for a solo 401k provider. Let’s compare some of the main firms that offer solo 401ks. We’re going to start with the 5 major firms that provide Prototype Plans. These are the “free” plans that the companies advertise.
Recommended Reading: Can I Use My 401k To Start A Business
What Are The Qualifications To Create & Contribute To A Solo 401k
Unlike the SEP IRA, the Solo 401K has no age or income restrictions. In order to be able to contribute to one, your contributions must come from self-employment income in that year.
As with the SEP IRA, you do not need to be full-time self-employed in order to be eligible. You could be part-time self-employed or earn a side income from a secondary job or side hustle. And having a Traditional 401K through another employer does not exclude you from being able to start and maintain a separate Solo 401K.
You also do not need to have a registered corporation in order to be eligible.
The other qualifier is that you cannot employ any full-time employees, outside of the exception of a spouse. Full-time employees are considered to be those that work an average of at least 30 hours per week for his/her employer.
Comparing The Most Popular Solo 401k Options
There are thousands of financial products and services out there, and we believe in helping you understand which is best for you, how it works, and will it actually help you achieve your financial goals. We’re proud of our content and guidance, and the information we provide is objective, independent, and free.
But we do have to make money to pay our team and keep this website running! Our partners compensate us. TheCollegeInvestor.com has an advertising relationship with some or all of the offers included on this page, which may impact how, where, and in what order products and services may appear. The College Investor does not include all companies or offers available in the marketplace. And our partners can never pay us to guarantee favorable reviews .
For more information and a complete list of our advertising partners, please check out our full Advertising Disclosure. TheCollegeInvestor.com strives to keep its information accurate and up to date. The information in our reviews could be different from what you find when visiting a financial institution, service provider or a specific product’s website. All products and services are presented without warranty.
I’ve been doing my research over the last few months on the best solo 401k providers for small businesses and side hustlers like myself. I’ve shared in the past the best options for saving for retirement with a side income, and I’ve leveraged a SEP IRA in the past.
You May Like: How To Transfer 401k From Old Job
Do You Qualify For A Self
Are you a self-employed professional planning for your retirement? A self-employed 401 is an excellent plan to build out your retirement nest egg. Whether you are a freelancer, shop owner, or small business owner without employees, a solo 401 retirement plan can help you live your dream life when you retire. Here well discuss an overview of a self-employed 401, setting one up, how to withdraw from the account and other vital information.
What Are The Potential Tax Benefits Of A Solo 401
One of the potential benefits of a Solo 401 is the flexibility to choose when you want to deal with your tax obligation. In a Solo 401 plan all contributions you make as the “employer” will be tax-deductible to your business with any earnings growing tax-deferred until withdrawn. But for contributions you make as an “employee” you have more flexibility. Typically, your employee “deferral” contributions reduce your personal taxable income for the year and can grow tax-deferred, with distributions in retirement taxed as ordinary income. Or you can make some or all of your employee deferral contributions as a Roth Solo 401 plan contribution. These Roth Solo 401 employee contributions do not reduce your current taxable income, but your distributions in retirement are usually tax-free. Generally speaking, there are tax penalties for withdrawals from a Solo 401 before 59 1/2 so be sure to know the specifics of your plan.
Recommended Reading: How Much Can You Put Into A 401k Per Year
