The “Solo 401(k) plan” is an IRS approved type of qualified plan. In essence, this is best for business owners with employees other than themselves or, perhaps a spouse. The “one-participant 401(k) Plan” is not a new type of plan. In fact, it is a traditional 401(k) plan covering only one employee. The plans have the same rules and requirements as any other 401(k) plan.
As a result of the EGTRRA tax law change, there is a surging interest in these plans. This tax law change became effective in 2002. The law changes how salary deferral contributions are treated when calculating the maximum deduction limits for contributions to a 401(k) plan. Under those circumstances, the change created opportunities for people to put away more toward their retirement.
It’s mindful to heed all Solo 401(k) Rules set forth by the IRS.
Solo 401(k) Plans allow you to engage in most types of investments. However, if a Solo 401(k) Plan engages in certain types of “prohibited transactions” it may trigger a prohibited transaction. This could lead to disqualification of the Solo 401(k) Plan. Not to mention severe tax consequences.
Prohibited Transaction Rules
Therefore, it is important that you familiarize yourself with the Solo 401(k) prohibited transaction rules. Here’s a list of helpful links to help you better understand your Solo 401(k):
- First, the Internal Revenue Code Section 4975 – IRC provision referencing tax on prohibited transactions
- Second, the Internal Revenue Code Section 512 – IRC provision describing unrelated business taxable income
- Third, the Internal Revenue Code Section 511 – IRC provision imposing tax on unrelated business income
- Fourth, the Internal Revenue Code Section 513 – IRC provision describing an unrelated trade or business.
- Fifth, the Internal Revenue Code Section 401 – Primary IRC provision relating to the 401(k) Plan
- Sixth, the Internal Revenue Code Section 72 – Primary IRC Section relating to the 401(k) Plan loan
Did you know?
There is no annual reporting for your Solo 401(k) Plan if the plan is worth less than $250,000.