Solo 401k Plans

Written by Jacey Harmon
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Solo 401K plans are a viable option to consider when deciding what type of retirement plan to choose. Solo 401K plans are a spin-off of the popular 401K plan common to many large corporations. Solo 401K plans are designed specifically for owner only small businesses and independent contractors.

Solo 401K plans were created in 2001 by the Economic Growth and Tax Relief Reconciliation Act (EGTRA). The act allowed for changes to laws governing traditional 401K plans. The changes in the law allow small businesses to take advantage of the positive aspects of 401K plans without the prohibitive costs that accompany larger plans like the 401K. Some estimate that 17 million people may be able to take advantage of these plans.

Tax and Investment Benefits of Solo 401K plans

Solo 401K plans have special tax benefits that should be considered when determining what type of retirement plan to choose. Specifically, solo 401Ks have higher contribution limits compared to most other plans. Higher contribution limits allow an individual to reduce taxable income while taking advantage of the long term effects of compounding. In some instances an individual can contribute up to $41,000 annually, or even $44,000 if over age 50. Consulting with a plan provider and tax professional will help determine what amount can be contributed to a solo 401K.

In addition to reducing taxable income, Solo 401Ks grow tax deferred until the investment is withdrawn out of the account. There are regulations regarding how and when money can be withdrawn from a solo 401K and penalties may occur for early withdrawal. Again, it is important to meet with a plan administrator for determining the availability of funds in an account.

The investments available are determined by the plan administrator. Plan administrators usually have an array of investments to choose from for proper diversification of your portfolio. Diversification reduces the risk involved with investing but may also limit the possible return. Though the plan administrator provides the types of investments available, the owner of the plan determines how the money is actually invested.

More Positives of Solo 401K Plans

Another positive aspect to solo 401Ks is they allow for an individual to consolidate retirement assets. An individual may combine his previous investment accounts such as an IRA, SEP Plan or profit sharing plan into just one solo 401K. This will reduce the amount of paperwork involved and streamline your retirement planning.

Funding a solo 401K is very flexible compared to other retirement plans. When you contribute to the plan is entirely up to you. One may also vary the amount contributed on an annual basis. For instance one may contribute $10,000 in the first year, $25,000 in the second year and $6,000 in the third.

The deadline for establishing a solo 401K is the last day of your businesses tax year. There are regulations regarding when contributions can be made to new plans depending on the type of business you own. A plan administrator will be able to help in determining when contributions can be made to new plans. Establishing solo 401K plans are as simple as meeting with a plan administrator and filling out the proper application.

Who Can Use Solo 401K Plans?

Solo 401Ks can be utilized by any business that employs only the owner and their immediate family, such as spouse and children. Sole proprietorships, corporations, including subchapter S and C, and partnerships all qualify for solo 401K plans. There are some instances where a small business that has employees may be able to open a solo 401K.


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