A Solo 401K Plan, also known as an Individual 401 or Self Directed 401K Plan is a qualified retirement plan that is cost-effective and is designed specifically for small business owners or self-employed individuals.
The Solo 401K IRS Plan is IRS approved. Before the Economic Growth and Tax Reconciliation Act of 2001 (EGTRRA) became effective in 2002, there was no additional benefit for an owner only business or self-employed individual to adopt a Solo 401K Plan since they would be able to receive the same benefits by adopting a profit sharing plan or SEP IRA. But the adoption EGTRRA opened the door for an owner only business or self-employed individual to put more money aside for retirement than a SEP or a profit sharing plan as well as adopt a more cost-effective easy to administer plan. Another feature that was created by EGTRRA was the ability for a plan participant to make designated Roth contributions that could potentially generate tax-free earnings. Also, EGTRRA expanded the 401K Plan loan feature of 401K Plans to cover owner-only businesses.
In sum, EGTRRA was the catalyst for the booming popularity of the Solo 401K Plan. The main advantage of using a Solo 401K Plan over a SEP IRA or a profit sharing plan is the high contribution limits.
The annual Solo 401k contribution consists of 2 parts, an employee salary deferral contribution and an employer profit sharing contribution. In 2011, the total contribution limit for a Solo 401k is $49,000 or $54,500 if age 50 or older. The total allowable contribution limits are combined to get the maximum Solo 401k contribution limit.
The sum of both contributions can be a maximum of $49,000 per year (for 2010) or $54,500 for persons over age 50.
If the business owner’s spouse elects to participate in the Solo 401(k) 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 2010 or $108,000 if both spouses over age 50.