A Solo 401(k) is designed for self-employed individuals or business owners with no full-time employees other than a spouse and or children. Part-time employees or employees who have not yet met the eligibility criteria can be excluded.
It combines elements of a traditional 401(k) plan and a profit-sharing plan, allowing the account holder to contribute as both an employer and an employee. Contributions are tax-deductible, and investment gains are tax deferred.
Self-employed individuals, sole proprietors, and business owners with no full-time employees other than a spouse are typically eligible.
- Contributions to a Solo 401(k) are made with pre-tax dollars, reducing the plan sponsor’s taxable income for the year.
- Earnings on investments within the plan grow tax-free until withdrawal.
- Plan sponsors can make both employer and employee contributions, allowing for substantial retirement savings.
- Employee Contributions: Plan sponsors can contribute a portion of their compensation (up to the annual limit) as employee contributions.
- Employer Contributions: As the employer, plan sponsors can also make profit-sharing contributions, which are typically calculated as a percentage of the plan sponsor’s net self-employment income.
The IRS sets annual contribution limits for Solo 401(k) plans, which may vary based on the plan sponsor’s age and income. The contribution limits are typically higher compared to traditional IRAs.
Solo 401(k) plans offer a broad range of investment options, including stocks, bonds, mutual funds, exchange-traded funds (ETFs), real estate, and more.
Unlike other retirement accounts, Solo 401(k) plans do not have required minimum distributions (RMDs) during the plan sponsor’s lifetime, allowing for tax-deferred growth for an extended period.
Plan sponsors can often roll over funds from existing retirement accounts, such as traditional IRAs or former employer-sponsored plans, into their Solo 401(k).
- SEP IRAs are easy to establish and maintain, with minimal administrative work and reporting requirements.
- Employers can typically set up SEP IRAs with financial institutions, such as banks or investment firms.
The Solo 401(k) plan remains portable, meaning it can be maintained regardless of changes in self-employment status or job transitions.