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Solo 401k Eligibility and Frequently Asked Questions (FAQ)

Solo 401(k) FAQ

If you are interested in establishing a Solo 401k, review the following frequently asked questions to determine Solo 401k qualifications and learn basic features of the Solo 401k plan.

Solo 401k FAQs

What is a Solo 401k Plan?

A solo 401k is a qualified 401k retirement plan specifically designed for one participant. The retirement plan is designed for employers who have no full-time employees other than themselves, a business partner and a spouse.

Also called a self-employed 401(k), self-directed 401(k) or one participant plan, the Solo 401k became popularized when congress passed the Economic Growth Tax Relief Reconciliation Act (EGTRRA) in 2001. Prior to EGTRRA, self-employed workers and small business owners could establish retirement plans unique to self-employed individuals that lacked benefits of the employer-sponsored 401(k).

What are the Benefits of the Solo 401(k) Plan?

The Solo 401(k) plan provides many benefits to individuals who are eligible for the plan, including the ability to make higher contributions. For example, the total annual contribution for a Solo 401(k) is $61,000 for participants who are under 50. Participants who are age 50 and over can contribute up to $67,500 to the plan in 2022. This is because the Solo 401(k) has two types of contributions:
Employee salary deferral contribution: Employees can contribute up to $20,500
Employer profit-sharing contribution: The annual limit is 25% of the employee’s pay, or 20% if you’re self-employed
Catch-up contributions allow individuals aged 50 and older to contribute up to $67,500 to the plan.
Additional benefits of the Solo 401(k) plan include:
$50,000 tax and penalty-free loan (or 50% of account value, whichever is less) to be used for any purpose.
Ability to make alternative investments, such as real estate and traditional investments, such as stocks.
No need to establish a Limited Liability Company (LLC) to make investments, which can be costly.
Exemption from UBTI tax when using leverage for real estate investments.
Stronger creditor protection than individual retirement accounts (IRAs).
Not subject to ERISA rules, as the business of the Solo 401k holder does not have employees.
Cost-effective and easy administration.
A major advantage of a self-directed retirement account, such as a Solo 401(k) retirement plan, is that you no longer have to make stock market investments. With this type of retirement account, you can make investments in real estate, tax-liens, private funding, and more. Essentially, you can invest in assets you know and understand.

Who qualifies for a Solo 401k?

To qualify for the Solo 401k plan, you must be self-employed and generate some form of self-employment income and provide proof. If you are the owner of a business, you must not have full-time employees, excluding yourself, business partner(s) and a spouse who is involved in the business.

What investments can I make with a Solo 401k?

Popular investments you can make with a Solo 401k include:

Residential or commercial real estate
Raw land
Foreclosure property
Mortgage pools
Bitcoin and other Cryptocurrencies
Private loans
Tax liens
Private businesses
Limited Liability Companies
Limited Liability Partnerships
Private placements
Stocks, Bonds, Mutual Funds
Most currencies

A Solo 401k lets you use your retirement funds to make virtually any type of investment that is IRS approved.
Read More: Tips for Making Investments with a Solo 401(k)

How much can I contribute to my Solo 401k?

Annual contributions as an employee to the Solo 401(k) plan in 2022 cannot exceed $20,500 for participants under age 50 and $27,000 if 50 and older. Contributions made as an employee is known as the “elective deferral.”
As an employee of a self-employed business or small business with no full-time employees (other than an owner or a spouse), you have the option to make the Employee Contribution. This is also known as the Elective Deferral. For 2022, the Solo 401(k) maximum contribution limit for the elective deferral is 20,500 if you’re under age 50. This is an increase from the 2021 contribution limit. Whereas, the elective deferral contribution if you’re 50 and older is $27,000. Employee deferral contributions can be made in pretax or Roth.
The 2022 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 $20,500. If you qualify, you can make this contribution pretax 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 plan on the profit sharing side – 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 $61,000 in 2022. If age 50 or older, it’s $67,500. These contribution numbers include the employee deferral contribution of $20,500 (under 50) and $27,000 (over 50).

How can I start a Solo 401k?

First, open an account with a custodian that allows for alternative investments if you wish to invest in real estate, precious metals, tax liens and more. Transfer/rollover funds from your current custodian to the new custodian. Setup time for the Solo 401k generally takes one or two days to complete.
Learn more about how to get started with a Solo 401k plan.

Is an Individual 401k the same as a Solo 401k?

While the Solo 401k and Individual 401k are both owner-only retirement plans, the individual 401k is typically offered by brokerage firms and traditional financial institutions. Whereas a Solo 401k plan is generally offered by Self-Directed custodians who administer the plan, such as IRA Financial Trust.

Traditional institutions and brokerage firms generally limit participants to the financial products they sell, such as stocks, bonds, mutual funds, ETFS, etc., while a Self-Directed custodian gives clients the freedom to make alternative investments (real estate, precious metals, foreign currency, etc.) as well as traditional investments.

Many people ask, “what does a Self-Directed Solo 401(k) mean?” In essence, a Self-Directed Solo 401(k) is similar to a traditional 401(k). The main difference is the type of investments you can purchase. For example, if you set up a Solo 401(k) at a bank, you will not have the option to invest in real-estate, cryptos, gold, private businesses, and more. However, with a Self-Directed Solo 401(k) you also have the option to make traditional investments. Hence, the main difference, is how your Solo 401(k) plan allows you to diversify your portfolio.
Read More: Beginner’s Guide to Alternative Investments

What are the Solo 401k contribution types?

There are two types of Solo 401k contributions.

Elective deferral: As an employee of a self-employed business with no full-time employees, you can make an employee contribution known as the elective deferral. The solo 401k employee contribution in 2020 is $19,500 if you’re under age 50 and $26,000 if you’re 50 and older.

Profit Sharing: As the employer of a self-employed business with no full-time employees, you can make an employer contribution known as a profit sharing contribution. Unlike the elective deferral, the profit sharing contribution is based on a percentage of income. For 2020, you can make a contribution of $37,500 whether you are under or over 50 years old.

Learn more about the 2020 Solo 401k contribution limits.

Can a spouse contribute to the Solo 401k?

If your spouse is involved in the business and earns compensation from it, he/she can contribute to the Solo 401k plan. The spouse can make separate and equal contributions increasing the couples’ annual total contribution to $114,000 for 2020 or $127,000 if both spouses are over age 50.

Does a Solo 401k Plan allow for Roth contributions?

Most 401k plans do not allow for a Roth-type contributions. However, the Solo 401k plan at IRA Financial allows participants to treat contributions that would otherwise be elective deferrals as designated Roth contributions. The Roth feature of a Solo 401k only allows after-tax salary deferral contributions. No employer contributions and no pretax employee contributions are permitted.

Most of the Solo 401k rules that apply to a regular 401k plan also apply to a Roth 401k plan.

What is a Solo 401k Plan loan?

The Solo 401k plan allows participants to borrow up to $50,000 or 50% of the account value – whichever is less. One of the most significant advantages the Solo 401(k) is that you can use it to take out a loan tax and penalty-free. Under Internal Revenue Code Section 72(p), a Solo 401k Plan participant can borrow up to 50% of the total 401(k) value or $50,000 (whichever is less). Participants can borrow this for any purpose, such as paying off debt or funding your business.

Repayment of the loan is based on a schedule provided when the loan is initiated. You must pay the loan back (including interest) over a term of up to five years. Participants must make loan payments at least quarterly and at a minimum interest rate of Prime. As of 03/38/22, the Prime interest rate, as per the Wall Street Journal, is 3.50%. Failure to make the loan payments may cause a loan default causing taxes and IRS penalties.

How do I pay off the Solo 401k Loan?

Solo 401k participants must repay the loan over an amortization schedule of five years or less. Payment frequencies must be no greater than quarterly. The interest rate must be set at a reasonable rate of interest, generally set at prime rate as per the Wall Street Journal. As of 3/28/22, the prime rate is 3.50%. The Interest rate is fixed based on the prime rate at the time of the loan application.

Can my spouse borrow the Solo 401k loan?

If your spouse participates in the business and earns an income, you and your spouse can borrow up to $50,000 ($100,000 total).

Can I have a Solo 401k and a regular 401k?

In answering the question of whether you can have a Solo 401k and a regular 401k, it is important to remember that individuals can be part of more than one 401k at a time, such as your work sponsored 401k and also be a part of a Solo 401k if he/she generates self-employment income.
Learn More: Best Retirement Plans for 2022

Can I have a Solo 401k plan and SEP IRA?

It is good practice not to have a SEP IRA and Solo 401k plan open at the same time. According to IRS Form 5305, any employer who establishes a SEP IRA using the form cannot have both a SEP IRA and Solo 401(k) Plan opened at the same time.

The main reason is that both plans have employer profit sharing options. However, if a bank or IRA custodian establishes the SEP IRA by using an individually drafted document other than IRS Form 5305, then an employer can have a SEP IRA and Solo 401k plan at the same time. However, this is quite uncommon.

What commonly occurs is that an employer will have a SEP IRA and make contributions to it and then open a Solo 401(k) plan. Then the employer will roll the SEP IRA contributions tax-free into the plan. The employer will then close the SEP IRA and only keep the Solo 401(k) plan.

How do I Initially Fund the Solo 401(k) Plan?

Like the Self-Directed IRA LLC, to initially fund the Solo 401(k) you may rollover funds from:
Traditional IRAs
SEP Plans
Previous employer 401(k) plans
Money Purchase plans
Profit Sharing plans
Keogh plans
Defined Benefit plans
403(b) plans
Rollover IRAs
You can roll over all of these funds tax-free. Accomplish this by setting up a Trust account for the Solo 401(k). Then directly transfer the funds from the current Custodian to the trust bank account. You can open the trust account at any local bank or credit union.

Can I contribute my entire salary to the Solo 401k?

Solo 401k participants can contribute their salary to the Solo 401k plan dollar-for-dollar, at a maximum of $19,500 (or $26,000 if age 50 and older) for 2020. However, you cannot contribute more than you earn from that business.

Is a Solo 401k Plan subject to ERISA?

The ERISA rules and regulations do not apply to a Solo 401(k) Plan since there are no common law employees to protect since the only employee(s) is the business owner(s) and spouse.

Is a Solo 401k protected from creditors?

Solo 401k plans are protected from creditors in a bankruptcy proceeding.
Corporate retirement plans have long been safe from creditors, thanks to the Employee Retirement Income Security Act of 1974, commonly known as ERISA.

How do I maintain a Solo 401k plan?

The Solo 401k plan is easy to operate. There is generally no annual filing requirement unless the plan exceeds $250,000 in assets. In such a case, you will need to file a short information return with the IRS (Form 5500-EZ).

Beyond this Solo 401k reporting requirement, you must maintain basic reporting requirements. This essentially means you must keep all records, receipts, contracts relating to the Solo 401(k) and its investments on file.

Can I open a Solo 401k plan online?

At IRA Financial Group you can open a Solo 401k directed from our app.
Learn more: Open a Solo 401k Online

Get in Touch

To learn more about the Solo 401k plan, we encourage you to download our free Solo 401k info kit. To get started, quickly and easily establish the Solo 401k on our free app and contact IRA Financial at 800-472-0646 and a specialist will help set you up.

Did You Know?

A Solo 401k plan allows contributions as both the employee and the employer which allows for maximum benefit. This makes the Solo 401k the most popular plan for the self-employed. Contact us and learn more!

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