Solo 401k

Over the last four decades, 401k plans including solo 401k plans for the self-employed have evolved into one of the most popular employee benefits.

What is a solo 401k plan?

Congress created the solo 401k plan to put the self-employed on the same playing field with big companies that also have the option to adopt a 401k plan. A solo 401k plan is the same as a traditional 401k (full-time employer 401k plan) except it is for an owner-only business that does not employ full-time, non-owner W-2 employees.

How do I qualify for a solo 401k plan?

In a nutshell you need to be performing at minimum part-time self-employment activity in order to open and continue with the Solo 401(k) plan, and it has to be active income versus passive investment income. One way to distinguish passive income versus active income is that active income is subject to Social Security taxes whereas passive income is not because it’s considered capital gains income. Visit Here to learn more about the solo 401k eligibility requirements.

What entity type can sponsor a solo 401k?

While solo 401k plans are generally sponsored by 1099 contractors and sole proprietors, the IRS has also made them available to the following entity types including incorporated businesses as long as the owners also actively work for the business:

  • Limited Liability Companies (LLCs)
  • S-Corporations and C-Corporations
  • Partnerships

Can my spouse also participate in my solo 401k?

As long as the business owner’s spouse also works for the self-employed business, they can both participate in the same solo 401k plan resulting in both being eligible to make annual contributions (e.g., Roth, pretax, and voluntary-after-tax) as well as fund the plan by transferring/rolling outside retirement accounts including former employer plans (e.g., traditional 401k, PS, TSP, 457b, etc.) and IRAs (e.g., traditional IRA, SEP IRA and SIMPLE IRAs). Lastly, separate holding accounts would be required under the solo 401k plan to hold each participant’s funds and source types. Visit Here to learn more.

Adding/Including Spouse in the Solo 401k Plan

Is a solo 401k the same as an Individual 401(k)?

In the eyes of the law, yes a solo 401k plan is the same as an Individual 401(k) plan in that they both can only be adopted by a business owner with no employees, or that person and his or her spouse. A solo 401k plan is also commonly called the following:

  • Solo-k
  • Uni-k
  • Individual-K
  • Solo IRA
  • One-participant k

However, to retirement account professionals and financial companies a solo 401k is a type of plan that can be self-directed into alternative investments (e.g., real estate, precious metals, cryptocurrency, private equity, etc.), allows for participant loans, and the mega backdoor strategy.  On the other hand, they view the individual 401(k) as being more restrictive (i.e., it does not allow for participant loans, roth contributions or voluntary after-tax contributions, or for making alternative investments).

Can the business exclude part-time employees from participating in my solo 401k?

In short, yes in the first three years. Starting in 2021 as a result of new solo 401k regulations promulgated under the SECURE Act, part-time employees who work 500 hours but less than 999 hours for three consecutive years  will need to be offered the chance to participate in the 401k plan. This new rule did not go into effect until January 2021; therefore, for new solo 401k plans opened in 2021 and those with existing solo 401k plans, the 500 hour count starts in 2021. This means that employees who work 500 hours per year in 2021 through 2023 will become newly eligible in 2024, and they must be allowed to participate.  In sum, business owners need to  prepare for 2024 by starting in 2021 to track part-time employees’ hours.

Can I contribute to a Roth IRA, a Traditional IRA and a solo 401k?

In short, yes if you meet certain rules. Contributions to IRAs and Roth IRAs are aggregated. This means that for 2022 you cannot contribute $6,000 to each type (i.e., traditional and Roth IRA); however, you can contribute some to each up to the $6,000 combined limit. If you are aged 50 or older in 2022, your IRA contribution increases to $7,000.

For traditional IRA contributions, while the IRS rules allow for contributions to both Solo 401k plans and IRAs, if you are also participating in a solo 401k plan, you can still make the traditional IRA contributions but they may not be tax deductible. See the chart listed on the following IRS link for these  limits: https://www.irs.gov/retirement-plans/plan-participant-employee/2022-ira-contribution-and-deduction-limits-effect-of-modified-agi-on-deductible-contributions-if-you-are-covered-by-a-retirement-plan-at-work

For Roth IRA contributions, while you can also contribute to a Roth IRA  and a solo 401k plan, not everybody qualifies for making a Roth IRA contribution if their modified AGI is over a certain limit. For these limits, please see the following chart. https://www.irs.gov/retirement-plans/plan-participant-employee/amount-of-roth-ira-contributions-that-you-can-make-for-2022

How are solo 401k contributions accounted and reported?

While solo 401k contributions are accounted for by depositing them into the solo 401k bank or brokerage account, they are reported on your personal and business tax return. See the following for each self-employed business entity type.

If the business is a sole proprietorship or an LLC taxed as a sole proprietorship:

If the business is a partnership or an LLC taxed as a partnership:

If the business is a C-Corporation, S-Corporation or an LLC taxed as an S-Corporation:

Solo 401k Contribution Guides-Deep Dive

Sole Proprietors, Single member LLC taxed or 1099 Independent Contractor

S-corp., C-corp., LLC Taxed as S-corp., W-2

Partnership, LLC Taxed as Partnership (Form 1065-K)

Why a Solo 401k?

There are a number of features of the Solo 401k that make it the qualified retirement plan of choice to an owner-only business.

Following are some of the benefits of the solo 401k plan:

Alternative Assets & Equity Investments

In addition to investing in stocks and mutual funds, our Solo 401k allows you to invest in many types of investments such as real estate, private equity, hedge funds, gold, private loans, and much more–all by writing a check. For a list of investment options click here.

Access to Participant Loans

Solo 401k permits you to take a loan or borrow from your retirement funds. This comes in handy if you have a growing company. Loans can be processed from the Solo 401k at 50% of the account balance but cannot exceed $50,000. To find out more about the loan option visit: Solo 401k Loan​ and Solo 401k Loan Facts.

For example, Gary has an account balance of $200,000. Fifty percent of his account is $100,000; however, the maximum loan that can be taken from a plan is $50,000.

Also, after the loan option has been exhausted, you may qualify to take a hardship withdrawal from the plan, provided certain criteria dedicated by the IRS are met. Please contact us at 800-489-7571 or e-mail us at [email protected] to find out more about this option.

Roth-Solo 401k

Our Solo 401k permits Roth contributions-taxes are paid going in but not going out. Also, Roth 401k contributions can be made regardless of income level, thereby affording taxpayers who would not otherwise be eligible to take advantage of the Roth component. For 2022, you can also contribute up to $61,000 to your Solo 401k, of which $20,500 can be allocated as Roth contributions. For 2023, you can contribute up to $66,000 to your Solo 401k, of which $22,500 can be allocated as Roth contributions.

CLICK HERE to learn more on how to maximize Roth sol0 401k contributions by making voluntary after-tax solo 401k contributions.

Voluntary After Tax  Contributions-Solo 401k

A solo 401k from My Solo 401k Financial also allows for voluntary after-tax contributions which can then allow you take advantage of the “mega back  door roth” transaction.

Following are some of the rules regarding this type of contribution:

  • Voluntary after-tax solo 401k contributions fall under the employee (salary deferral) contribution umbrella.
  • This type of contribution is not considered employer (profit sharing) contributions, so the contribution is not tax deductible because it is considered made with post-tax dollars.
  • When voluntary after-tax solo 401k contributions are converted to a Roth IRA or the Roth Solo 401k, the conversion has to be documented in writing by completing a conversion Form (the IRS will expect to see a copy of this form upon request), and a Form 1099-R has to be issued to report the conversion whether taxable or not.  This reporting is covered by our annual service and fee.
  • Voluntary after-tax solo 401k contributions can be distributed and thus converted at any time. This is why the conversion of voluntary after-tax solo 401k contributions has been dubbed the “mega-backdoor Roth solo 401k.”
  • There is a lesser known rule called the “overall 415 limits.” The overall 415 limit for 401(k) plans including solo 401k plans. For 2022, the overall limit is $61,000. The overall limit looks at the total annual additions to all of a participant’s accounts in plans maintained by one employer and includes not just their salary deferrals, but also matching contributions, allocations of forfeitures and other amounts. Voluntary after-tax solo 401k contributions are subject to the overall annual limit (“The 415 Limit) $61,000 for 2022, and $66,000 for 2023.

To learn about the differences between Roth solo 401k contributions and voluntary after-tax contributions VISIT HERE.

Mega Backdoor Roth Solo 401k Guides- Deep Dive

Solo 401k Contribution Types

  1. Employer profit sharing contributions are always made on a pretax basis and are tax deductible on the business tax return.
  2. Pretax employee salary deferral contributions are tax deductible on the individuals tax return (i.e., Form 1040).
  3. Roth designated employee contributions are a type of employee contribution that, unlike pre-tax employee contributions, are currently includible in gross income but tax-free when distributed.
  4. Employee voluntary after-tax contributions are not excluded from income and cannot deduct them on your tax return.
  5. Catch-up employee contributions can only be made if the participant is age 50 or over at the end of the calendar year and cannot be applied as a voluntary after-tax contribution.

To learn about the various solo 401k contribution types, CLICK HERE.

Solo 401k Investments Questions

Question: Refinance a Property in the Solo 401k Plan: I currently own a house free & clear in my solo 401k and I would like to do a cash out refi on the property.  Question – Can I do a cash out refi with any bank and have the refi proceeds go directly into my solo 401k account or do I have to do the refi with a bank that specializes in non-recourse loans?

Answer: If the idea is to have the  solo 401k plan invest in an additional real-estate property, the solo 401k can obtain a nonrecourse loan and the borrowed funds would be used toward the purchase of a new investment property by the solo 401k plan. For a list of non-recourse lenders, please click here.

Do I have to file a Form 5500-EZ for  my solo 401k?

It depends if the total value of the plan’s assets exceed $250,000 in value as of the end of the plan year or if the plan is closing. Form 5500-EZ is used by owner-only plans such as a self-directed solo 401k that are not subject to the requirements of Internal Revenue Code section 104(a) of the Employee Retirement Income Security Act of 1974 (ERISA) to report the fair market value of the solo 401k plan as of the end of the plan year.

Illustration:

If a plan meets all the requirements for filing Form 5500-EZ and its total assets (either alone or in combination with one or more one-participant plans maintained by the employer) exceed $250,000 at the end of the 2022 plan year, Form 5500-EZ must be filed for each of the employer’s one-participant plans including those with less than $250,000 in assets for the 2022 plan year, and the form is due to the government by July 31, 2023.

Note 

You should use the total plan assets as listed as of the end of the plan year on line 6a(2) of  Form 5500-EZ to determine whether the plan(s) assets exceed $250,000. If an employer maintains one or more one-participant plans, the total assets of all one-participant plans combined must be counted towards the amount of $250,000. For more solo 401k FAQs, visit here.

Solo 401k Checking Account QUESTION

How do you guys handle check writing privileges for these accounts? Do I have to go open an account with the bank?

With our solo 401(k) plan, we will handle getting it set up with an account at the bank and/or brokerage of your choice where you will have checkbook control.

Our customers have their solo 401(k) accounts at hundreds of different banks, credit unions, etc. as well as brokerage firms such as Fidelity and Schwab just to name a couple.

If you want a brokerage account, we will prepare all the forms that the brokerage firm needs to open a free account (i.e. there are no account opening or maintenance fees and the brokerage firm only charges trading and wire transfer fees) and many firms (including Fidelity and Schwab) offer a free checkbook feature.

If you want a bank account, we will prepare a packet (including banking guide, certificate of trust, EIN letter, etc.) that you can use to open an account at the bank of your choice. We will also be available to speak with your banker if he or she has any questions.

Closing Down the Solo 401k QUESTION

If in a few years I wanted to close down my solo 401k and move all assets out to an IRA or Roth IRA elsewhere, would I be able to do that. Are there any fees or penalties for doing so or for closing the account?

Specific IRS rules apply when closing down a retirement plan including a solo 401k plan. When you are no longer self-employed or decide to terminate the plan, the plan funds can be transferred to the respective IRAs. We would prepare the final Form 1099-Rs and Form 5500-EZ to formally close the solo 401k plan with the government. The closure of the solo 401k plan is covered in our annual fee and no additional fees apply.

The Mega Back Door Roth Solo 401k Strategy QUESTION

If I do the mega back door Roth/Voluntary After-Tax Solo 401k Contributions, is it true that I can do those to the full amount possible without having to worry about the employer contribution 25% of Net Earnings rule? Meaning the Employer non-elective contributions up to 25% of compensation rule. That is, as long as I have the required net self-employment compensation I can make my full 2022 solo 401k contribution amount of $61,000 as a voluntary contribution correct?

Your understanding is correct that the solo 401k rules allow for just making voluntary after-tax contributions without having to make pretax employee or pretax employer profit sharing solo 401k contributions.

Open Solo 401k Past Age 72 QUESTION

I realize that at age 72 I must start taking distributions. My business will still be making money after I am 72, can I continue to yearly fund my 401K?

Your understanding is correct that the solo 401k rules allow for just making voluntary after-tax contributions without having to make pretax solo 401k contributions.

Naming the Solo 401k QUESTION

Does my business name have to match the solo 401k plan name?

Th name of the self-employed business will not impact the Solo 401k plan. The plan has a separate name and EIN number.  We will be able to assist with the EIN if you prefer. You will Provide the name that you would like to assign to your new solo 401k trust. For example, if you are a sole proprietor or a contractor, a common method of naming a solo 401k is to to use a fictitious name followed by “Trust.” For example, “Media Street Trust.” Alternatively, if you have a business name, the whole or the first two parts of the business name is commonly used followed by “Trust” (but it doesn’t have to as noted above).

Voluntary After-Tax Contributions Even if Contribute to My Day Time W-2 Job 401k Plan QUESTION

For 2022, I’m a W2 employee at Eastern Airlines and I contribute to that employers 401k plan. Can I also make the full voluntary after-tax contribution of $61,000 for 2022 to my solo 401k plan based on my earned income from my self-employed business?

Correct – you can contribute voluntary after-tax contributions to the solo 401k plan without regard to contributions made to a w-2 employer sponsored plan (a day time employer).  See more below:
  • The voluntary after–tax contribution limit is 100% of your self-employment compensation not to exceed the overall limit (IRC Section 415(c)) which is $61,000 for 2022 REDUCED BY any salary deferrals or profit sharing contributions made to the Solo 401k.
  • The 415c limit is applied on a per employer basis (assuming that the employers are not related).
  • This means that the fact that you made employee contributions (salary deferrals) to a 401k plan sponsored by an unrelated employer (via a day job) you can still make voluntary after–tax contributions for 2022 of up to $61K to the Solo 401k (assuming that you have the self-employment income to justify such contributions).

Returning Coronavirus (COVID-19) Distributions to a Roth IRA or Roth Solo 401k QUESTION

I took a COVID-19 related distribution in 2019 in the amount of 100,000 from my pretax solo 401k plan. Can I roll those funds to a Roth IRA or a Roth Solo 401k?

Coronavirus Aid, Relief, and Economic Security (CARES) Act was designed to assist the millions of Americans including those who participate in 401k plans including solo 401k plans affected by the outbreak.

However, in order to make withdrawals from retirement plans including solo 401k plans, the coronavirus-related distribution (CRDs) must be satisfied which make up the following:

  1. is diagnosed with COVID-19, with a CDC-approved test;
  2. whose spouse or dependent is diagnosed with COVID-19, with a CDC-approved test;
  3. who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19; or
  4. other factors as determined by the Treasury Secretary.

For a full breakdown VISIT HERE.  And VISIT HERE for FAQs.

If you did qualify for the $100,000 CRD exception, not the funds can not be deposited back to the Roth solo 401k if they are originally distributed from the pretax solo 401k; instead, they would need to flow back to the pretax solo 401k account or to a pretax IRA (e.g., a Traditional IRA, SEP IRA or SIMPLE IRA).

After-Tax IRA /Non Deductible IRA QUESTION

My client has a Traditional IRA with commingled pre-tax Rollover IRA funds from employer and after-tax contribution reported on Form 8606. Can my solo 401k's plan document accommodate rollover of this account?

The pretax IRA funds (i.e., the earnings) and the rest of the pretax funds can get transferred to the solo 401k, but the basis would need to be converted to a Roth IRA. The IRA rules don’t allow for the after-tax IRA basis (i.e., the non-deductible IRA contributions) to be converted or transferred to the solo 401k.

Rollovers from Defined Benefit Plan & Former Employer 401k QUESTION

Can the solo 401k plan you offer accept rollover of asset from another old employer sponsored 401K or a Defined Benefit Plan (I am considering one)?

 A solo 401k plan is often used to consolidate form employer plans and IRAs. Yes the solo 401(k) allows for transfers from former employer plans which also includes defined-benefit plans and former employer 401(k) plans in addition to IRAs. Assuming these are pretax funds, they would get transferred to the pretax solo 401k.

The Solo 401k 2022 Establishment Deadline  

What is the Solo 401k Establishment Deadline for Making 2022 Solo 401k Contributions?

For making employee salary deferral contributions, the solo 401k had to be adopted by December 31, 2022 for self-employed businesses operating on a  calendar-year basis.   Otherwise, if the solo 401k plan is adopted on January 1, 2023 or after but by your business tax return due date including extensions, you will only be allowed to make employer profit sharing contributions not employee contributions to the solo 401k plan. To learn more about the December 31, 2022 plan adoption/establishment deadline VISIT HERE.

Is the Mega Backdoor Roth Solo 401k Going Away QUESTION

Is there proposed legislation to ban the mega backdoor Roth solo 401k?

That seemed to be the case until President Biden announced on December 16, 2021 that the pending Build Back Better (BBB) bill (H.R. 5376, the “BBB Act”) would not be reviewed again. As a result of the BBB being squashed, solo 401k participants will be able to continue to make voluntary after-tax solo 401k contributions for 2021 and future years including 2022 and 2023, for example, and subsequently convert those contributions to the Roth solo 401k or the Roth IRA.

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