Solo 401K plans have been designed for the self-employed business person and their spouse who have no full-time employees. Contributions to the plan are tax deductible like other self-directed IRA accounts, and the funds are considered to be assets that are intended to grow without being taxed directly as income or capital gains until you withdraw the funds from the account.
The Solo 401K plans are fairly new to the market and offer specialized benefits such self-management of the account and elimination the middle man such as brokers, bankers, or trust companies. The Solo 401K limits you and your spouse to contributions just over $100,000 a year into your accounts. Funds from other self-directed IRA and can easily be transferred to the new Solo 401K plans without tax ramifications.
Unlike other self-directed IRA accounts, the Solo 401K puts no restrictions on how you invest the funds. You can choose real estate, private companies and even commodity markets. Solo 401K rules allow owners to borrow up to $50,000 per owner and $100,000 total if a spouse jointly participants in the plan.
You do need to repay the loan over a five years period, and prime rates do determine the interest rate amount included in the repayment plan. The advantage to taking the loan is that you will not pay taxes on the funds borrowed as long as the loan is repaid. If you withdraw the funds directly, there will be penalties and income taxes due just like traditional IRAs.
There are Solo 401K rules and Solo 401K limits to be eligible for participation in this tax savings plan. Doing business with independent contractors will not affect your eligibility, and business forms such as sole proprietorships, partnerships, LLCs or corporations are eligible, as long there are no full-time employees other than the owner of the business and spouse.
As a business owner, you may be your best investor and investment because the Solo 401K rules have provisions that allow business owners to contribute company profits into your retirement account. There are Solo 401K limits: business owners can match up to 25% of their total earned pay, which is calculated from your W-2, but you cannot exceed more than 20% of your business’s total net income or profit.
Unless you are educated and experienced in these tax savings plans, it is in your best interest to seek advice from an industry professional.