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Is the $1500 Solo 401k Tax Credit Limited to the Costs to Open a Solo 401k?
No, unlike the startup cost tax credit, the $1500 solo 401k tax credit allows you to claim the full amount even if your actual setup and administration costs are less than $1500. This makes it an especially valuable credit.
The Secure Act created two tax credits for setting up and maintaining a retirement plan for your small business:
- Startup Cost Tax Credit
- Credit of up to $5,000 for 50% of eligible startup costs to establish a new qualified retirement plan
- Eligible expenses include administration and retirement-education expenses
- Business must have at least one non-highly compensated employee to qualify
- Solo 401k Tax Credit
- Credit of up to $500 per year for 3 years for costs to establish and administer a new solo 401k plan
- Not limited to actual costs – you can claim the full $500 credit each year even if costs are less
- Available for solo business owners or businesses without non-owner employees
Here is a comparison of the two credits:
| 401k Tax Credit | Maximum Amount | Limited to Actual Costs? | Non-Owner Employees Required? |
|---|---|---|---|
| Startup Cost | $5,000 per year for 3 years | Yes | Yes |
| Auto Participation | $500 per year for 3 years ($1500 total) | No | No |
The solo 401k credit (i.e. automatic participation credit) is very valuable for solo entrepreneurs since you can claim the full amount even if your costs are minimal.
For example, if Susan starts a consulting business and sets up and maintains a solo 401k for 3 years, with only $900 in total costs, she can still claim the full $1,500 total in tax credits since it’s not limited to actual costs. This allows her to more than recoup the costs of establishing her retirement plan.
So in summary, no – the generous solo 401k tax credit allows you to claim the full amount each year, regardless of how much you spent on costs.
