Self Employed 401k plans, like other types of qualified plans, must meet the basic qualification requirements for retirement plans as outlined in Code Section 401(a).
Advantages afforded to a Solo 401k plan that is qualified
The many advantages of having a qualified Self Directed 401k plan or Solo 401k include the following:
- The employer can take a tax deduction for making contributions to the self employed 401k plan.
- Investment earnings of the Solo 401k plan’s assets are not subject to current taxation.
- As a Participant or Trustee of the plan, you can avoid current taxation of amounts allocated to the self directed 401k.
- As a Participant/Trustee of the plan, you may roll over plan benefits from or to other employer-sponsored plans or IRAs tax-free.
The Solo 401k plan must be in writing
Some states recognize the existence of an oral trust; however, a Solo 401k or self-directed 401k plan will not be considered qualified unless it is established and operated in accordance with a definite written program. This is outlined in the following regulation- [Treas. Reg. 1.401-19(a) (2)]. The Solo 401k written document must include all provisions essential for qualification as outlined in [Rev. Rul. 74-466, 1974-2 C.B. 131]. The Solo 401k Plan document serves to define the rights and obligations of the plan sponsor, Participant/Trustee, and beneficiaries. It also must be reviewed by the IRS, which it then issues a determination letter confirming that the plan is tax-qualified.