Pursuant to IRS and Department of Labor (DOL) rules and regulations, any business that either does not employ any employees or any employee that works in excess of 1000 hours a year is eligible to adopt a Solo 401k Plan.
The Solo 401k Plan, also known as the Individual 401k Plan, is perfect for any business formed as an S Corporation. As long as the S Corporation meets the following requirements, it is eligible to adopt a Solo 401k Plan:
(i) The business must include the presence of self employment activity.
(ii) The business must not have any full-time employees.
The main advantage of using a Solo 401k Plan is that the owner of the S Corporation can contribute the following amounts annually for 2011:
- 100% of W-2 earnings up to the maximum of $16,500 or $22,000 if age 50 or older. The employee contribution election must be made prior to December 31.
- 25 percent of the compensation paid. Accordingly, a profit sharing contribution up to 25% of W-2 earnings can be contributed into a Solo 401k. In other words, in the case of company, the employer profit sharing contribution must be based on the compensation paid by company not the overall profits earned by the company.
The sum of both contributions can be a maximum of $49,000 per year (for 2011) or $54,500 for plan participant is over age 50.
If the business owner’s spouse elects to participate in the Solo 401k Plan and earns compensation from the business, the spouse is allowed to make separate and equal contributions increasing the couples’ annual total contribution to $98,000 for 2011 or $108,000 if both spouses over age 50.
In addition to the high contributions limits, the Solo 401k Plan allows plan participants to borrow up to $50,000 or 50% of their account value (whichever is less) for any purpose. The loan has to be paid back over a five year period at least quarterly at a minimum prime interest rate (you have the option of selecting a higher interest rate).
One of more noteworthy advantages of the Solo 401k Plan is that it allows the Plan participant to make traditional as well as nontraditional investments, such as real estate or precious metals, tax-free!. Just like a Self Directed IRA, the trustee of the Solo 401k Plan will have “checkbook control” over his or her retirement funds to make investments tax-free! Also, a Solo 401K plan allows one to eliminate the expense and delays associated with an IRA custodian since the Solo 401K Plan account can be opened at at any local bank or credit union.