Solo 401k FAQs

What is a Solo 401k?

The Solo 401k is an exciting new retirement plan option for the self employed created by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). Businesses employing only the owner or owner and spouse can now benefit from extremely beneficial retirement planning and tax saving options via a Solo 401k. Businesses qualifying for this favorable treatment in the tax code include Sole Proprietors, C and S Corporations, Partnerships, and LLCs.

What is special about the Solo 401k?

Each year the funding of the Solo 401k plan is completely discretionary and flexible. Funding can be increased, decreased, or skipped entirely if necessary. The contribution flexibility of a Solo 401k eliminates potential funding worries if there is a bad business year.

For those age 50+ there is a generous $5,000 "catch up" salary deferral contribution and a total 2008 maximum contribution limit of $51,000.

How much can be contributed to a Solo 401k?

In 2008 the maximum Solo 401k contribution limit is $46,000 or $51,000 if age 50 or older. If the spouse is employed by the business and provided there is adequate income, the contribution limits can potentially be doubled.

How is the Solo 401k contribution calculated?

The Solo 401k contribution consists of two parts: the salary deferral contribution and the profit sharing contribution. The salary deferral contribution permits as much as 100% of the first $15,500 compensation as a tax deductible contribution ($20,500 if age 50+). In addition, a profit sharing contribution is permitted equal to 20% of net self employment income for unincorporated businesses or 25% of W-2 income for incorporated businesses.

• View examples of solo 401k contribution limits.
   
• To determine the annual retirement contribution you could make based on your income use the solo 401k calculator.

Who is eligible for a Solo 401k?

Businesses whose only full time employees are the owner or the owner and spouse, whether incorporated or unincorporated including partnerships and LLCs are eligible. A business is eligible if the business has employees who each work less than 1000 hours per calendar year or utilizes independent contractors or if all employees are age 21 or less.

Are Solo 401k contributions 100% tax deductible?

Yes, salary deferral and profit sharing contributions are generally 100% tax deductible.

Subchapter S and C corporations or LLCs electing to be taxed as a corporation can generally deduct the salary deferral contribution from personal W-2 earnings and the profit sharing contribution as a business expense.

A sole proprietorship, partnership or a LLC taxed as a sole proprietorship can generally deduct salary deferral and profit sharing contributions from personal income.

How can I take a loan from a Solo 401k before retirement age?

The Solo 401k is unique because it permits the small business owner to borrow 1/2 of the funds in the 401k ($50,000 maximum) for any reason at any time, tax free and penalty free. The loan must generally be repaid within 5 years according to an amortization table set up before taking the loan, although a 10-15 year payback is allowable for the purchase of a home. The plan must also specifically allow loans . There are no tax consequences if loans are repaid on schedule.

Questions and answers about a solo 401k loan

Can my spouse contribute to the Solo 401k?

Yes, provided the spouse is employed by the business and is on the payroll. Owner and spouse businesses are one of the biggest beneficiaries of the Solo 401k because with sufficient income they can potentially contribute $92,000 total or $102,000 if both are age 50+ in 2008. 

What happens if my business grows and I need to hire full time employees?

If you anticipate hiring W-2 employees with more than 1000 hours of service in a calendar year this year, then a Solo 401k may not be the appropriate retirement plan for you. If all employees are under age 21 or if the business employs independent contractors the business is eligible.  Contact a BCM advisor to discuss your retirement options.

What is the deadline for establishing a Solo 401k?

The deadline for establishing a Solo 401k is December 31st of the year in which you would like to receive the tax deduction or fiscal year end for corporations.

What is the deadline for making salary deferral contributions?

For unincorporated businesses the deadline is the tax filing date of April 15 of the next year plus extensions. For incorporated businesses the deadline is 15 days after the close of the fiscal year. For instance if December 31 ends the fiscal year, make contributions by January 15 of the next year.

What is the deadline for making profit sharing contributions?

For unincorporated businesses the deadline is the tax filing date of April 15 (or October 15 if an extension was filed). For incorporated businesses the deadline is corporate tax filing deadline March 15, plus extensions.

What are the responsibilities of the plan administrator?

The plan administrator (usually the business owner) must make contributions prior to the deadlines, make timely payments according to the loan amortization schedule if a loan has been taken, and file Form 5500 if plan assets exceed $250,000.

Can other retirement plans be rolled over into a Solo 401k?

Yes. This includes IRA, Rollover IRA, 401k, SEP IRA, Keogh Plans (including Profit Sharing and Money Purchase), Defined Benefit Plans and 403b Plans. By consolidating multiple retirement plans retirement assets can be easily monitored and a greater selection of investment choices may be gained. Another advantage of rolling over retirement accounts into a Solo 401k is these assets become eligible for a loan.

Rollovers are a fast way to build assets in the Solo 401k, assets which then become loan eligible, up to a limit of $50,000 or half of plan assets, whichever is less.

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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.