Get in touch Call or visit a branchCall us: 800-454-9272 175+ Branches Nationwide Go City, State, Zip Solo 401(k) What is a Solo 401(k)? Open new account Simply put, a Solo 401(k) is a retirement account designed for the self-employed, or business owners with no full-time employees. A Solo or Individual 401(k) plan offers many of the same benefits of a traditional 401(k) with a few distinct differences. What are the potential tax benefits of a Solo 401(k)?One of the potential benefits of a Solo 401(k) is the flexibility to choose when you want to deal with your tax obligation. In a Solo 401(k) plan all contributions you make as the "employer" will be tax-deductible (subject to IRS maximums) to your business with any earnings growing tax-deferred until withdrawn. But for contributions you make as an "employee" you have more flexibility. Typically, your employee "deferral" contributions reduce your personal taxable income for the year and can grow tax-deferred, with distributions in retirement taxed as ordinary income. Or you can make some or all of your employee deferral contributions as a Roth Solo 401(k) plan contribution. These Roth Solo 401(k) employee contributions do not reduce your current taxable income, but your distributions in retirement are usually tax-free. Generally speaking, there are tax penalties for withdrawals from a Solo 401(k) before 59 1/2 so be sure to know the specifics of your plan. What are the contribution levels and limits of a Solo 401(k)?To take full advantage of contributions to a Solo 401(k) plan you must understand your limits as an employee and employer, as well as contributions allowed on behalf of a spouse if applicable. When contributing as the employee, you are allowed up to $19,500 or 100% of compensation (whichever is less) in salary deferrals for tax year 2021 and $20,500 or 100% of compensation (whichever is less) for tax year 2022. If you are over 50, an additional $6,500 catch-up contribution is allowed bringing the total contribution up to $26,000 for 2021 and $27,000 for 2022. This is the type of contribution that can be made as pre-tax/tax-deferred or Roth deferral or a combination of both. Additionally, as the employer, you can make a profit-sharing contribution up to 25% of your compensation from the business up to $58,000 for tax year 2021 and the maximum 2022 solo 401k contribution is $61,000. When adding the employee and employer contributions together for the year the maximum 2020 Solo 401(k) contribution limit is $57,000 and the maximum 2021 solo 401(k) contribution is $58,000. If you are age 50 and older and make catch-up contributions, the limit is increased by these catch-ups to $64,500 for 2021 and $67,500 for 2022. Compensation from your business can be a bit tricky. This is calculated as your business net profit minus half of your self-employment tax and the employer plan contributions you made for yourself (and other business owners and any participating spouses who are also in your Solo 401(k) plan). The limit on compensation that can be factored into your tax year contribution is $290,000 for 2021 and $305,000 for 2022. A Solo 401(k) can only be used by business owners who have no employees eligible to participate in the plan. You will set up your plan eligibility requirements in the Solo 401(k) plan documents used to establish your plan legally. The IRS has set limits on when employees must be included in your plan, so be sure to follow the rules. If an employee meets your plan eligibility, then you must include them and begin following certain testing and discrimination rules, which may require you to hire a benefits consulting or administration firm to help you. The one exception to the no-employee rule for a Solo 401(k) is for a spouse who earns income from your business. In 2021, your spouse can contribute up to $19,500 as an employee (plus the catch-up provision if 50 or older), and you can make the same percentage of employer contribution that you made for yourself (up to 25% of compensation). In 2022, this contribution limit is increased to $20,500 as an employee (plus the catch-up provision). This exception effectively allows you to double the amount you can contribute as a family.
Find a small business retirement plan that fits youNot sure if a Solo 401(k) plan is the right decision for you? Take a look at other small business retirement plans that are available.
|