401k Plan for Owner-Only Business or Those with Part-Time Employees Only
Solo 401k plan (commonly referred by other names such as owner only 401k, Individual 401k, self-employed 401k and self-directed solo 401k) came to be in 2002 with the passage of EGTRRA. As a result, the owner-only business, whether sole proprietor, partnership, corporation, or LLC can now open Solo 401k.
Features of a Self-Directed Solo 401k:
| Self Directed Solo401k Establishment | The golden rule for qualifying for Solo 401k is the presence of self-employment, whether full-time or part-time. Next, you must not have any full-time employees, so part-time employees are okay (those working 1,000 hours or less per year). Further, only both spouses or both business partners and their spouses can contribute to Solo 401k. Lastly,Solo 401k documents must be executed (known as prototype documents). |
| Solo 401k Trustee /Plan Administrator | The business owner(s) typically serve in Trustee capacity and thus have option to safe keep the Self-Directed Solo 401k plan assets. Language confirming this can be found by visiting IRS Solo 401k. |
Solo 401k Employee Contributions |
You can contribute only if you generate net income from self-employment activity. The Maximum contribution for 2020 is $19,500 and is based on maximum earnings of $285,000. Visit Solo 401k contribution calculator. |
| Solo 401k Catch-up Contributions |
If age 50 or older in 2020, each Solo 401k participant can contribute an extra $6,500 for 2020 known as catch-up contribution, thus increasing the maximum contributions to $63,500 per active participant for 2020. |
| Solo 401k Employer Contributions | You can contribute only if you generate net income from self-employment. Contribution is based on 25% of pay (20% for self-employed) and cannot exceed $57,000 for 2020. Salary deferral contributions (employee contributions discussed above) are also counted towards this limit. |
| Rollovers/Transfers | Solo 401k accepts transfers/rollover from all types of plans, such as 401k plans, profit sharing plans, defined benefit plans, government 457(b) plans, TSP, 403(b) plans, SEP and Traditional IRAs. SIMPLE IRAs are eligible for rollover after two year holding period is met. Visit Consolidating Retirement Plans to learn more. |
| Solo 401k Loans | You can borrow/take a Solo 401k Loan—available to each participant. The minimum loan amount is $1,000 and the maximum is 50% of Solo 401k account balance not to exceed $50,000. So if Solo 401k balance is $60,000, the maximum loan amount is $30,000. Lastly, the Solo 401k loan must be in writing. Your Solo 401k provider will generally prepare the Solo 401k loan documents free of charge. |
| Solo 401k Investments
Government Reporting |
Solo 401k can be invested in alternative investments (e.g., precious metals, tax liens, real estate, private placements) in addition to equities (mutual funds and stocks).
Solo 401k is subject to annual reporting once the account balance exceeds $250,000. Reporting if filed with IRS using IRS Form 5500-EZ. Solo 401k is also subject to reporting once you commence making distributions using Form 1099-R. Therefore, even though Solo 401k is subject to limited reporting, whether taxable or not, it is strongly suggest to make sure you open solo 401k with a Solo 401k provider that includes such services in their annual fees. |
