What is a Solo 401k?


A Solo 401k is a retirement plan designed for self—employed people that do not employ other individuals outside of themselves and/or their spouse.

This type of plan has been an option since 2006.

If you are the owner of a sole proprietor business, an S Corporation, C Corporation, or a partnership, a retirement plan you may want to consider is the Solo 401k.

Establishing a Solo 401k is relatively simple.

There are no required discrimination tests of Form 5500 filing, which is a form bigger 401k plans must file with the IRS in order to be in compliance.

Unless your Solo 401k account reaches more than $250,000, you will not have to file the Form 5500 with the IRS.

Misleading Name, Worthwhile Plan

The Solo 401k account is mislabeled because you can actually set up an account for you and your spouse. You can also utilize the Solo 401k in a partnership and can exclude any employee working part time with less than 1,000 hours each year. If you have employees that work more than those hours or plan on hiring employees at some point in the future, a different plan should be considered.

Solo 401k Contributions 2010-2012

You do not have to contribute to your account each year but are 100% vested immediately. Similar to the traditional 401k account, you can choose to defer up to $16,500 of pre-tax income for 2011 and $17,000 for 2012. For those over the age of 50, a total contribution to catch up is allowed up to $5,500 which amounts to a total of $22.000. In addition to the $17,000, you can also make a profit-sharing contribution totaling up to 25% of your salary based on your W-2 as the employer. This amount cannot exceed $49,000.

Setting Up a Solo 401k

In order to make a contribution for a tax year, a plan has to be established by the end of the business tax year. This differs from a SEP IRA which allows account set up until taxes are filed. A big benefit of the plan is that the administrative requirements are relatively minimal since the plan is only for you.

When you are making the profit-sharing contributions, the owner and their spouse must get the same percentage of pay contributions. You can make contributions at any time of the year as long as the account has been set up and the contributions have been made before December 31st.

Other Plan Details

You are allowed to borrow from a Solo 401k plan. You are able to borrow up to either 50% of the value of the account or $50,000. You must first check to ensure the custodian of the account permits borrowing by reading the terms of the account. If borrowing is allowed, the terms of borrowing include:

  • Repayment of the amount using an amortization schedule of 5 years or less.
  • Regular repayments must be made at least quarterly
  • The rate of interest is deemed reasonable and is typically calculated as prime rate plus 1%

Another benefits of the Solo 401k plan is that you can manage your account without having to deal with another party including banks, brokers, or trust companies.

It is wise to consider the advantages and disadvantages of each type of retirement account before making a commitment. If you are eligible for a Solo 401k account, read the fine print of the account and be sure it is compatible with your financial goals.

Paul Sundin

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