Solo 401 K
The Solo 401 K is a powerful tool for retirement saving. The plan is a 401 k that has been tailored and simplified for self-employed people. One of its most attractive features is its high contribution limits which allow a substantial portion of income to be shielded from taxes.
Solo 401 k contributions
As a self-employed individual, you can contribute to the plan as both employer and employee. Your increased ability to contribute also raises your investment amount over other traditional self employed retirement plans.
As employee, you can contribute your entire earnings to the plan up to the employee contribution limit. The cap is $17,500 annually, with those over 50 years allowed $23,000 (for the year 2013).
As employer, you can also contribute an additional 20% of your compensation as a profit sharing contribution. The plan gives greater flexibility and a potentially bigger amount than the typical employer match.
In addition, the plan also allows the spouse to participate if the spouse is also employed by the adopting business of the plan. The IRS counts the employed spouse as an owner-employee, and the spouse can also contribute from his/her earnings from the business. With both contributing, married couples can enjoy tax savings of about $100,000 annually.
Roth contributions are another feature. You can designate your employee contribution to be Roth, pre-tax, or a combination of both. With pre-tax contributions, the contribution amount is not counted as taxable income. With Roth contributions, you pay taxes on the contribution amount, but those funds grow within the plan and can be withdrawn from the 401k at a later date tax-free.
Ways to set up the plan
Setting up and administering the plan can be simple or complex, depending on the provider. When choosing a provider, weigh your investment objectives.
If opting for traditional investments such as mutual funds, the large brokerage firms like Fidelity, T. Rowe Price, Charles Schwab, Vanguard can set up the accounts for a low administration fee. They will also assist with required IRS forms once the retirement plan balance exceeds a certain limit.
Their additional charges such as for stock trading, however, can add up. Their lower fees for establishing and managing the account may be outweighed by the investment-based fees and restricted options. Costs are kept down, for example, by restricting participants from drawing loans against their accounts. Explore the plan variations offered by different companies before settling on one.
If you would like to participate in both traditional and non-traditional investments, look for a provider that offers self-directed plans with checkbook control. These plans are structured without a custodian and allow for a diversity in investment options.
With a self-directed plan, you are named as the trustee, fiduciary, participant, and plan administrator. You would be responsible for keeping the plan documents, contributing to the plan prior to deadline, and filing relevant IRS forms as needed.
Related Terms:
- Solo 401 k
- Solo 401 k plan
- Solo 401 k plans
- Solo 401k rules