For 2023, you can contribute up to $66,000 to a Solo 401(k), plus an additional $7,500 “catch-up” contribution if you are at least age 50. Contributions can be made as both the employer (profit sharing) and the employee (elective deferral). The employee deferral contribution can be made in pretax, after-tax or Roth, while the profit sharing contribution can only be made with pretax funds.
To be eligible for a Solo 401(k) plan, you must meet two eligibility requirements: the presence of self-employment activity and the absence of full-time employees. Solo 401(k) eligibility includes the presence of “self-employment activity.” This generally refers to the ownership and operation of: A sole proprietorship, Limited Liability Company (LLC), C Corporation, S Corporations and Limited Partnership where the business intends to generate revenue for profit and make significant contributions to the plan.
Self-employment activity can be part time, and it can be ancillary to full time employment elsewhere. A person can even participate in an employer’s 401(k) plan in tandem with their own Roth 401(k) retirement plan. In such a case, the employee elective deferrals from both plans are subject to the single contribution limit. There are no established thresholds for: profit the business must generate, how much money must be contributed to the plan, when and how quickly the profits and contributions must occur
Unlike a regular 401(k) plan, a Solo 401(k) retirement plan can be implemented only by self-employed individuals or small business owners with no other full-time employees. Additionally, they must not be employed by any business owned by them or their spouse. An exception applies if your full-time employee is your spouse. The business owner and their spouse are technically considered “owner-employees” rather than “employees”.
In order to maintain Solo 401(k) eligibility, the following types of employees may be generally excluded from coverage: employees under 21 years of age, employees that work less than 1,000 hours annually, union employees, nonresident alien employees
Do you have full-time employees aged 21 or older (other than your spouse)? Do your part-time employees work more than 1,000 hours a year? If yes, you must typically include them in any plan you set up. However, a business eligible for the plan can have part time employees and independent contractors.
*Did you know that individuals who participate in the Gig economy are eligible for a Solo 401(k)? Learn more about different side-jobs individuals can do to open a Solo 401(k).
If your spouse is involved in the business and earns compensation from it, he or she can contribute to the Solo 401(k) plan. Your spouse can make separate and equal contributions essentially doubling the annual amount you can contribute.
The IRS only describes what types of investments you cannot make with a Solo 401(k). These include collectibles, such as art, and any transaction that involves a disqualified person. Note: Unlike an IRA, you can invest 401(k) funds in life insurance (on a limited basis).
Many individuals open a Solo 401(k) to save for retirement. Some individuals have traditional jobs and pay into a regular 401(k) or IRA and a Solo 401(k). One of the benefits of opening a Solo 401(k) is the ability to save more! Employer sponsored 401(k)’s are limited by lower annual contributions. Individuals can open a Solo 401(k) to put more money away and diversify their retirement portfolios. Furthermore, opening a Self-Directed Solo 401(k) will allow you to invest in traditional and alternative investments. With IRA Finacial’s Solo 401(k) plan, you can invest in stocks, bonds, and mutual funds. In addition, you can invest in alternative investments to help diversify your portfolio. Popular alternative assets include: Real Estate, Bitcoin, Foreign Currencies, Gold and Precious Metals, Privately Owned Companies/Pre IP Companies, and Traditional Investments including Stocks and Bonds.
There are countless opportunities to diversify your retirement account with a Solo 401(k). While some of the investments you can make are listed above, the options are endless. Instead, with a Solo 401(k) there are only three things you cannot invest in. Best of all, you can open a Self-Directed Solo 401(k) without every stepping foot in the bank.
IRA Financial Group is the only company where you can set up a Solo 401(K) directly from our mobile app. That means you can do everything from our app, set up and account, fund the account, invest, and establish a Solo 401(k). It’s very simple to set up. All you need to do is set up an account with IRA Financial, roll over funds into your new Solo 401(k) account or make an initial contribution. And then as trustee, you’ll have checkbook control so you can make alternative assets like real estate or even traditional investments like stock directly from your account. IRA Financial is the only Solo 401(k) custodian that has a special relationship with Capital One. You’re able to open the account directly from our app, never leave your house, no need to ever go to a bank.
An IRA cannot engage in a transaction with a disqualified person
; these include you (the IRA Owner), your spouse, any lineal descendants or ascendants (parents, grandparents, children, grandchildren), their spouses, and any entity where a disqualified person owns more than 50%
A required minimum distribution (RMD) is the amount you must withdraw from your Solo 401(k) once you reach age 72. The amount is generally about 3% of the total account balance. Unlike a Roth IRA, Roth 401(k) plans are subject to the RMD regime.
Unlike an IRA, you can borrow money from your 401(k) plan. You may take a Solo 401(k) loan of up to $50,000 or 50% of your account balance – whichever is less. The loan must be paid back with a frequency of no less than quarterly. If you fail to pay back the loan, it will be treated as a taxable distribution, and penalties may apply if you are under age 59 1/2.
Because a Solo 401(k) is a tax-advantaged retirement account, there is no tax return due. However, if you have more than $250,000 in the plan, a short, informational return, called Form 5500-EZ, must be filed annually.
The major benefit of using a Solo 401(k) to make a real estate investment is that it is exempt from the UBTI tax. Therefore, you can use leverage (borrowing money) to purchase real estate, and not be subject to tax. The UBTI tax does apply to IRA real estate investments that use non-recourse financing.
The Roth Solo 401(k) plan is basically a regular Solo 401(k) plan with a Roth feature. It combines features of the traditional Solo 401(k) with features of the Roth IRA. A Solo 401(k) plan with a Roth feature allows one to make Roth contributions of up to $22,500 or $30,000 if at least age 50 for 2023. Unlike pretax plans, contributions to a Roth Solo 401(k) are not tax deductible, however, so long as the Roth account is opened at least five years and the plan participant is over the age of 59 ½, all distributions would be tax free. At age 59 ½, you may be able to live off your Roth Solo 401(k) retirement funds tax free; or keep investing: take out a portion of your funds for any investment purpose, whether it be business or personal without paying one dollar in tax
If you are looking to “supersize” your Roth holdings, you can contribute after-tax money, on a dollar-for-dollar basis to your Solo 401(k) up to the annual limit. You can then immediately roll over those funds to a traditional IRA and then convert it all to a Roth IRA.