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What You Need to Know About Making Contributions to a Solo 401(k) Plan After 70 1/2

Solo 401(k) contributions after age 70 ½

Unlike a Traditional IRA, which does not allow you to make pre-tax IRA contributions after reaching the age of 70 ½, a Solo 401(k) plan participant can make Solo 401(k) contributions after age 70 ½.  In other words, if you are still employed by a company that has established a Solo 401(k) plan, you can continue to make contributions to your employer-sponsored Solo 401(k) or SEP IRA. In addition, you also would not be required  to start taking required minimum distributions (“RMDs”) so long as you do not own 5% or more of the company.  In the case of a Solo 401(k) plan, also known as a Self-Employed 401(k) or Individual 401(k) plan, satisfying the 5% threshold may prove difficult since most Solo 401(k) plans are adopted by a sole business owner.

In addition, an individual may contribute directly to a Roth IRA after he or she has reached age 70 ½ (up to the annual $6,500 limit, which includes a $1,000 catch up amount). Direct Roth IRA contributions, however, are subject to income limitations that apply to reduce the contribution limits for taxpayers who earn more than $189,000 (married taxpayers) or $120,000 (single taxpayers) in 2018.

In sum, if you have a Solo 401(k) plan and continue to receive earned income from the business that adopted the plan, you will be able to continue to make contributions to the plan after the age of 70 ½.  However, assuming you don’t own less than 5% of the company, you will be required to take RMDs on the value of your 401(k) plan balance as of December 31. The annual RMD amount is generally around 3% of the fair market value of the 401(k) plan assets.  The same rules apply to a SEP IRA.  Whereas, in the case of a Roth IRA, contributions can be made after the age of 70 ½ , but there will be no RMD since Roth IRAs do not have an RMD requirement.  In contrast, in the case of a pre-tax traditional IRA, no contributions can be made after the age of 70 ½ and the pre-tax IRA is subject to the RMD regime.

If you have self-employed income, a Solo 401(k) offers beneficial contribution rules.  High contribution limits and the ability to defer income after the age of 70 ½ make the plan tax-advantageous for owner-only businesses and those with other self-employed income.

For more information about the benefits of the Solo 401(k), please contact us @ 800.472.0646.

Posted in Solo 401(k)