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Solo 401(k) plan (also known as an individual 401(k) Plan or self-directed 401(k) Plan) is a retirement plan few of us are familiar with. So what exactly is it?
A solo 401(k) plan, or Individual 401(k) Plan, helps people who are self-employed. Additionally, if you’re an individual who generates a portion of your total income through self-employment activities, you, too, can benefit. Finally, small business owners with no full-time employees (except themselves or a spouse) can take advantage of a Solo 401(k) plan.
This plan is much like a traditional 401(k) plan, except it covers only one employee. So, basically it’s an IRS-approved plan for people who are self-employed or a sole owner-employee of a corporation. But it does have the same rules and requirements as a traditional 401(k).
A few main purposes of using a Solo 401(k) is to make employee referral contributions and for individuals to borrow/lend money or make investments. You can take out up to 50% or 50,000 from your retirement account – whichever is less.
The IRS created the Solo 401(k) to specifically help the above group of individuals. To break it down, that includes:
Unlike a traditional IRA, SEP-IRA or SIMPLE IRA, you can save more money, have more options to grow your retirement account, and it’s very cheap and easy to oversee. Additionally, with a Solo 401(k), you can invest in real estate and borrow money penalty and tax-free.
But these aren’t the only reasons why the Solo 401(k) is better than an IRA. Other benefits include:
The IRS makes the maximum contribution for IRAs low. For example, the contribution limit for a Self-Directed IRA in 2018 is $5,500. If you’re over the age of 50, it’s $6,500. However, with a Solo 401(k) you can invest so much more. Your spouse can also make contributions to the plan if he/she receives compensation from the business.
The 2018 Solo 401(k) plan states that an individual who is under the age of 50 can make a maximum employee deferral contribution in the amount of $18,500. If you qualify, you can make this contribution pre-tax or after-tax. This is great when you reach retirement age and your taxable income is most likely lower.
If you’re under 50, you can also benefit from the “one-participant plan” on the profit sharing side. So, your business can make a 25% contribution. In other words, you can take out 25% of your business’ profits and place it into your solo 401(k). In the case of a sole proprietorship or single member LLC, it’s a maximum 20% profit sharing contribution of $55,000 in 2018. If over 50, it’s $61,000. And this includes the employee deferral contribution of $18,500 (under 50) and $24,500 (over 50).
One of the many benefits of using a Solo 401(k) is that you grow your retirement account by diversifying your investments. Step away from traditional investments and spend your money on new opportunities. This can include real estate, tax liens, raw land, rentals, foreclosures, etc. This is possible if you choose a Self-Directed Solo 401(k) Plan.
All income and gains on these investments go back to your Individual 401(k) Plan tax-free. As trustee, you have full control to make any investment you want without custodian consent.
Are contribution options flexible? Absolutely. You can make contributions for any purpose. You also have the option to invest as much as legally possible, reduce, or suspend investments. Basically, you can make contributions. But there’s no requirement to do so.
People find the Solo 401(k) more attractive because of how easy it is to manage. Unless it is higher than $250,000 in assets, there are no filing requirements. If it does exceed that amount, then you must file Form 5500-EZ. This is a short information form that you to send to the IRS. If you wanted to, you could establish a Solo 401(k) at a traditional financial group, such as Vanguard. However, you don’t receive the same flexibility as if choosing IRA Financial Group’s Solo 401(k) Plan, or a plan from another self-directed IRA company. Let’s quickly compare establishing your Solo 401(k) Plan at IRA Financial vs Vanguard.
The benefits of IRA Financial Group’s Solo 401(k) Plan vs Vanguard’s Solo 401(k) Plan are noteworthy:
So, are you ready to diversify your retirement portfolio, grow your funds tax-free and make investment decisions without custodian consent? Work directly with our retirement tax professionals to set up your Solo 401(k) today.