Solo 401k contributions after 70 1/2 are different than contributions at this age with an individual retirement account (IRA). With a traditional IRA, participants cannot make additional contributions once they reach 70 1/2 and are required to take out a minimum distribution (RMD). One of the benefits of the Solo 401k is that participants can still contribute after 70 1/2. In this article, we will explain exactly how this can be done.
Making Contributions to a Solo 401k Plan After 70 1/2
Unlike a Traditional IRA, which doesn’t allow you to make pre-tax IRA contributions after reaching age 70 1/2, a solo 401(k) plan participant can make 401(k) plan contributions after age 70 1/2. In other words, if you’re still an employer with a solo 401(k) retirement plan, you can continue making contributions to your employer-sponsored solo 401k or SEP IRA. Additionally, there’s no requirement to take required minimum distributions (RMDs). This is only if you do not own 5% or more of the company.
This differs in the case of a solo 401k plan, also known as a self-employed 401(k) or individual 401(k) plan. If you satisfy the 5% threshold, it may prove difficult since most solo 401k plans are adopted by a sole business owner.
Roth IRA at 70 1/2
In addition, an individual may contribute directly to a Roth IRA after he or she has reached age 70 ½ (up to the annual $7,000 limit, which includes a $1,000 catch up amount). Direct Roth IRA contributions, however, are subject to income limitations. These limitations 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 401k plan and receive earned income from the business that adopted the plan, you may still make contributions to the plan after age 70 1/2. However, assuming you don’t own less than 5% of the company, you must continue to take RMDs on the value of your 401(k) plan balance as of 12/31.
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 1/2. There will be no RMD requirements. This is because Roth IRAs don’t have an RMD requirement. However, in the case of a pre-tax traditional IRA, no contributions can be made after the age of 70 1/2. The pre-tax IRA is subject to the RMD regime.
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