Solo 401(k)

Self-Directed Solo 401(k)

A solo 401(k), also called an individual 401(k) or solo-k, is specifically geared for the self-employed and/or small business owners who do not have full-time employees (except themselves, their partners, or their spouses). This plan allows both employer and employee contributions: you can defer a portion of your salary into the account and have the business make a matching contribution into your plan.

Many people use a self-directed solo 401(k) so they can control their funds and choose their own investments for the plan. When you self-direct, you can use alternative assets to save for retirement—and you choose exactly what assets you want to invest in with your plan. There is a large pool of options besides stocks, bonds, and mutual funds you can choose for this purpose.

What Makes the Self-Directed Solo 401(k) so Powerful?

Self-directed solo 401(k) plans offer all the benefits of a solo 401(k) plus the ability to:

Advantages of a Solo 401(k)

  • You can make contributions as an employer and as an employee.
  • Pre-tax savings and higher contribution limits than traditional or Roth IRAs.
  • Roth and mega Roth options that allow you to maximize your employee contributions.
  • Employer contributions are tax-deferred and a deduction for the business.
  • Ability to borrow personally from the plan—up to 50 percent of the account balance (for a maximum of up to $50,000).
  • Trustees can be the business owner(s) and/or spouse(s) and can manage these accounts using checkbook control.
  • “C” corporations can contribute cash, property, or corporate stock and take deductions on those contributions within the limits set forth by the IRS.
  • Account owners may be able to lease property owned by these accounts.

Roth 401(k) Option

  • The Roth 401(k) option provides tax-free income on earnings in the account.
  • You can make after-tax employee contributions.
  • Contributions are not subject to the income limitations of a Roth IRA.
  • Roth and non-Roth contributions can be commingled within the same account—no other account type allows this.
  • You can immediately convert employer contributions to a Roth designation within your plan.

Mega Roth Option

  • You can maximize your total annual contributions by making employer + employee + mega Roth contributions.
  • Mega Roth contributions are made after-tax and must be immediately converted to the Roth component within the plan to grow tax free.
  • If the sum of your employer and employee contributions is less than the annual limit set by the IRS, the mega Roth component allows you to make up the difference in contributions for that tax year.

Qualifications for an Individual 401(k)

  • Businesses that are corporations, partnerships, LLCs, or sole proprietorships (such as self-employed individuals) and who do not have any full-time employees other than partners or their spouse.
  • To qualify for employer contributions, as an employee you must have received taxable earned income during the year.
  • If the only employees (other than the owners) of the business are under the age of 21 or do not work more than 1,000 hours/year (or 500 hours/year for a consecutive three-year period), the business owner can still use this plan.

Do you have a side business?

If you have a side business apart from your regular job, you can use an individual 401(k) even if you have a 401(k) through your employer. A solo-k sponsored by your side business can help you max out your overall 401(k) annual contributions if you and your employer are not contributing the full amount allowed to your employer-sponsored plan.

Deadline to Open a Solo 401(k)

You have until the last day of your business’s income tax reporting year, including extensions, to open a solo-k. Depending on how your business is set up, it may benefit you to establish your plan early in the year as you can to take advantage of employee salary deferrals.

SOLO 401(k) CONTRIBUTION LIMITS

Solo 401(k) Profit-Sharing Plan 2023 2024
Employee Elective Salary Deferrals $22,500 $23,500
Salary Deferral Catch-Up Contribution (age 50 and older) $7,500 $7,500
Employer Profit-Sharing Contribution Up to 25% of salary of self-employed earnings Up to 25% of salary of self-employed earnings
Total Combined Contribution: Salary deferral plus profit-sharing match (under age 50) $66,000 $69,000
Total Combined Contribution: Salary deferral plus-profit sharing match (age 50 or older) $73,500  $76,500

 

SECURE Act 2.0 Changes for Sole Proprietors 

Sole proprietors and single member LLCs were given special provisions in Section 317 of the SECURE Act 2.0—retroactive first-year elective deferrals. These employers are able to establish new solo 401(k)s after the end of the taxable year—and make contributions to count towards that taxable year—as long as the plan is established before the employer’s tax-filing date. This allowed for employer contributions to be made to the plan up until the day the employer filed their taxes. But employee contributions weren’t allowed after December 31 of the tax-filing year. Per section 317, sole proprietors and single member LLCs who establish solo 401(k)s in this manner can now receive employee contributions to the plan up to the date of the employee’s tax-filing date. This provision only applies to the initial year the new 401(k) is established and is effective for plan years that occur after the date of the enactment of the SECURE Act 2.0.

SECURE Act 2.0 Rules for Catch-Up Contributions

The Roth catch-up contribution provision for 401(k)s, 403(b)s, and 457(b) plans states all catch-up contributions for savers who earned over $145,000* in the prior year must be post-tax Roth contributions. Catch-up contributions are allowed for plan participants 50 years and older.

Previously, there was no income requirement, and catch-up contributions could be made with either pre-tax or post-tax dollars. The ability to make catch-up contributions in either pre-tax or post-tax dollars is still allowed for earners who made less than $145,000 in the previous year.

The IRS is allowing a two-year transition for Roth catch-up contributions as stated by guidance published in August 2023. The start date for this mandate is delayed until January 1, 2026, to allow employers and eligible plan participants adequate time to prepare and plan for the change. Employers that currently do not offer Roth options for their plans have this time to add Roth catch-up options to their plans and educate their employees and relevant administrators on IRS regulations surrounding this new law.

This transition period does not impact the ability for eligible plan participants to make catch-up contributions.

Advanta IRA Offers Three Solo 401(k) Options

Do Your Own Plan (Checkbook Control) Standard 401(K) Recordkeeping Plan Enhanced 401(K) Recordkeeping & Reporting Plan
IRS approved plan documents Provided by Advanta IRA.  Provided by Advanta IRA.  Provided by Advanta IRA.
Required updates to plan documents Advanta IRA updates plan documents and ensures IRS compliance at no additional cost to you. Advanta IRA updates plan documents and ensures IRS compliance at no additional cost to you. Advanta IRA updates plan documents and ensures IRS compliance at no additional cost to you.
Who acts as plan trustee? You do as plan owner. You do as plan owner. You do as plan owner.
Where is the uninvested cash held? It is held at a bank of your choice in an account you open in the name of your 401(k). It is held in Advanta IRA’s trust account. It is held in Advanta IRA’s trust account.
How are new investments processed? You ensure proper titling of investment paperwork. You execute all investment documents. You release funds from your 401(k) bank  account. Advanta IRA ensures proper titling of investment paperwork. You execute all investment documents. Advanta IRA releases funds. Advanta IRA ensures proper titling of investment paperwork. You execute all investment documents. Advanta IRA releases funds.
Who performs recordkeeping functions? You deposit investment income into and pay bills from the plan’s bank account. Advanta IRA deposits all
investment income into your plan and pays bills from it at your direction.
Advanta IRA deposits all
investment income into your plan and pays bills from it at your direction.
Who files appropriate tax forms? You are responsible for all IRS reporting. You are responsible for all IRS reporting. Advanta IRA prepares all annual tax filings, including forms 1099-R and 5500EZ.
How do I get checkbook control over my account? Checkbook control is automatic with this option. A separate entity like a trust or LLC is needed. A separate entity like a trust or LLC is needed.
How do I track separate pre-tax and Roth contributions, transfers, and earnings? As trustee, you are responsible for tracking separate pre-tax and Roth funds. Advanta IRA suggests setting up separate bank accounts for those funds. As trustee, you are responsible for tracking separate pre-tax and Roth funds. The pre-tax and Roth funds will be comingled into one Advanta IRA account. Advanta IRA establishes separate accounts for the pre-tax and Roth portions of your plan and tracks the contributions, transfers, and earnings.

 

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