Self-employment isn’t for everyone. The responsibilities of maintaining the business, providing excellent care for your customers, and staying ahead of your competitors all rest entirely on your shoulders. When considering your options for saving for retirement, your time is extremely limited.
Perhaps you’ve participated in a 401(k) plan in the past but assumed this option was off-limits to a small business owner with no employees. Plus, you’re unfamiliar with the requirements of sponsoring a 401(k) plan. However, the savings limits in an IRA don’t allow you to meet your savings goals. What other options do you have? Let’s take a look at the Solo 401(k) plan!
The Solo 401(k) plan has many names:
- Owner-Only 401(k)
- Solo 401(k)
- One-participant The Details
How Is a Solo 401(k) Plan Different Than a 401(k) Plan?
The Solo 401(k) is a 401(k) plan covering only the business owner or owners, and/or the business owners and their spouses. Solo 401(k) plans mirror the benefits of a 401(k) plan sponsored by a larger employer, plus a few additional benefits due to your limited workforce:
- The same tax incentives provided to sponsors of 401(k) plans apply to those establishing a Solo 401(k) plan. Namely, the investments made into the 401(k) plan are tax-deferred, meaning you won’t pay taxes on investments or their earnings until they are withdrawn.
- The 2016 contribution limits in a Solo 401(k) plan are $18,000 for elective salary deferrals. As the employer, you’re also allowed to make contributions of up to 25 percent of your net earnings (also known as a profit-sharing contribution.) Total contribution limits cannot exceed $53,000, or $59,000 with catch-up contributions.
- With no employees to participate in the plan, the normal non-discrimination testing required for 401(k) plans is unnecessary for a Solo 401(k) plan.
- Your investments are entirely self-directed. Instead of choosing from a limited portfolio, you can pick and choose the funds you’d like to invest in.
How Do I Get Started?
When establishing a Solo 401(k) plan, you are required to have a Plan Document. TriStar can design and complete your plan document for you, as well as maintain it on an ongoing basis to make sure that your plan remains qualified.
After your solo 401(k) plan exceeds $250,000 in assets, you’re required to file a Form 5500 EZ with the IRS, (we suggest to our clients that they file from day one) and that’s where we come in! We’ll not only perform calculations at the end of the year to ensure you haven’t exceeded the annual contribution limit, we’ll also prepare and file your Form 5500!
Consult with your financial or tax advisor about establishing a Solo 401(k) plan, and call us to review the next steps involved in establishing a plan for yourself.