Solo 401(k) Contributions After 70 1/2
As you may know, a traditional IRA does not allow you to make pre-tax IRA contributions after reaching the age of 70 ½. However, a Solo 401(k) plan participant can make Solo 401(k) contributions after age 70 ½. Essentially, if the company that established a Solo 401(k) plan still employs you, you can make contributions to your employer-sponsored Solo 401(k) or SEP IRA. Additionally, there’s no requirement to take out RMDs (Required Minimum Distributions) so long as you don’t own 5% or more of the company. In the case of a Solo 401(k) plan, also known as a Self-Employed 401(k) or Individual 401(k) plan, satisfying the 5% threshold may prove difficult. This is because most Solo 401(k) plans are adopted by a sole business owner.
Roth IRA Contributions
In addition, you can contribute directly to a Roth IRA after you reach age 70 ½ (up to the annual $6,500 limit, which includes a $1,000 catch up amount). Direct Roth IRA contributions, however, are subject to income limitations. These apply as a means of reducing 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 401(k) plan and continue to receive income from the business that adopted the plan, you can make contributions to the plan after the age of 70 ½. However, assuming you don’t own less than 5% of the company, you will have to take RMDs on the value of your 401(k) plan balance as of December 31.
Required Minimum Distribution
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 ½ , but there will be no RMD since Roth IRAs do not have an RMD requirement. In contrast, in the case of a pre-tax traditional IRA, no contributions can be made after the age of 70 ½ and the pre-tax IRA is subject to the RMD regime.
If you have self-employed income, a Solo 401(k) offers beneficial contribution rules. High contribution limits and the ability to defer income after the age of 70 ½ make the plan tax-advantageous for owner-only businesses and those with other self-employed income.