Benefits of the Solo 401k

Solo 401k Loan

A unique feature of a Solo 401k versus other self employed retirement plans is the ability to receive a Solo 401k loan. Loans are permitted up to 1/2 of the total value of the Solo 401k up to a maximum of $50,000. Solo 401k loans generally have a 5 year term. Solo 401k loans used to purchase a primary residence may be extended up to 10 or 15 years. With a Solo 401k loan principal and interest is repaid back to yourself into your Solo 401k. Loans must be repaid according to the terms of the loan amortization schedule which is provided when a loan is initiated. Failure to repay the loan according to these terms may result in a loan default causing taxes as well as IRS penalties.

A Solo 401k loan can be used for any purpose and can be provided tax free, penalty free and without credit checks or income qualifications.

Learn more about the features and specifics of a solo 401k loan.

Solo 401k Contribution Limits

In 2008, the Solo 401k contribution limit is $46,000 or $51,000 if age 50 or older. The annual contributions into a Solo 401k consists of 2 parts: a tax deductible salary deferral contribution plus an additional tax deductible profit sharing contribution.

1. Salary Deferral Contribution
   In 2008, 100% of compensation up to a maximum of $15,500 ($20,500 if age 50 or older) can be contributed in salary deferrals. For a corporation compensation is based on W-2 wages. For businesses taxed as a sole proprietorship compensation is based on net adjusted business profits. Net adjusted business profit is determined by completing an IRS worksheet. It is calculated by taking gross self employment income and then subtracting business expenses and then subtracting 1/2 of the self employment tax (FICA and Medicare).
    
2. Profit Sharing Contribution
   A tax deductible profit sharing contribution can also be made. For corporations the profit sharing contribution is based on W-2 wages and can be made up to 25% of W-2 compensation. For sole proprietorships a profit sharing contribution can be made up to 20% of net adjusted business profits. 

The maximum allowable Solo 401k contribution limit calculation simply adds the profit sharing contribution to the maximum salary deferral contribution amount to produce the total allowable contribution. The salary deferral and profit sharing contribution can not exceed the Solo 401k contribution limit. Compared to other retirement plans you may be able to contribute more with a Solo 401k at identical income levels, therefore maximizing retirement contributions and tax deductions.

Solo Roth 401k

Solo 401k salary deferral contributions can be made as Roth 401k (after tax) or Traditional 401k (pre-tax). The basic difference between a Roth 401k and a Traditional 401k is that the Roth 401k is funded with after-tax contributions while the Traditional 401k is funded with pre-tax contributions. In other words, with a Roth 401k you pay taxes today in return for a tax-free withdrawals in retirement. Traditional 401k contributions are tax deductible and are made pre-tax so you save taxes today, but withdrawals are taxed in retirement.

Learn more about a solo roth 401k.

Solo 401k Contribution Calculations

NOTE: The calculation of how much can be contributed to the Solo 401k is dependent on whether your business is taxed as a corporation and you receive a W-2 or if you are taxed as a sole proprietorship. Examples of both are shown below.

Sole proprietorship, partnership or a LLC taxed as a sole proprietorship.
- View examples of solo 401k contribution limits.

S or C corporation or a LLC taxed as a corporation.
- View examples of solo 401k contribution limits.

Solo 401k Calculator

To determine the annual retirement contribution you could make based on your income use the solo 401k calculator.

Retirement Plan Consolidation

An important feature of the Solo 401k plan is the opportunity to consolidate retirement assets into one account via a rollover or transfer. This includes a Traditional IRA, SEP IRA , 401k Plan, Money Purchase Plan, SIMPLE IRA, Profit Sharing Plan, Defined Benefit Plan, 403b Plan and Rollover IRAs.

Advantages of rolling over and consolidating your retirement plans into your Solo 401k include improved financial organization and ease of monitoring your retirement portfolio. Also, consolidating retirement accounts is particularly important if you would like to use the Solo 401k loan provision. By rolling over your existing retirement plans you build the balance quickly and then can use its value to receive a larger solo 401k loan.

Cost-Effective Administration

The Solo 401k plan is easy to setup and inexpensive to maintain. Administration is minimal, and complex discrimination tests are not required. IRS Form 5500 must be filed annually when plan assets exceed $250,000.

Contribution Flexibility

Each year the funding of the Solo 401k plan is completely discretionary and flexible. Funding can be increased, decreased, or skipped entirely if necessary.

Note: The deadline to open a Solo 401k is December 31st of the year in which you want to make the contribution or the fiscal year end, whichever comes first.

Solo 401k Frequently Asked Questions

Solo 401k FAQs. Find answers to your questions about the Solo 401k.

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Disclosures:

*  The information on this page is for informational purposes only and does not constitute, and should not be construed as, professional, legal or tax advice. To determine your individual tax situation and specific needs, please consult a professional tax advisor.

* Information contained in these sections merely highlight some benefits. There are risks involved with all investments that could include tax penalties and risk/loss of principal.