A Solo 401k plan is an IRS approved retirement plan, which is suited for business owners who do not have any employees, other than themselves and perhaps their spouse. The “one-participant 401(k) plan” or Solo 401k Plan is not a new type of plan. It is a traditional 401k plan covering only one employee. Like a SEP IRA, a Solo 401k Plan offers the Plan participant the ability to contribute up to $49,000 each year. However, there are a number of options that are specific to Solo 401k plans that make the Solo 401k plan a far more attractive retirement option for a self-employed individual.
- With a Solo 401K Plan you can make a contribution of up to $51,000 to the Plan for the 2013 tax year. ($56,500 if the individual is over the age of 50) However, unlike a SEP, the employee deferral component of the Solo 401k plan can be made in pre-tax or Roth (after-tax) format. Whereas, in the case of a SEP, the contributions can only be made in pre-tax format.
- With a Solo 401K Plan, when you are over 50 years old, you have the ability to make a $5500 catch-up contribution each year. There are no catch-up contributions for a SEP IRA
- With a Solo 401K Plan you can borrow up to $50,000 or 50% of your account value what ever is less. The loan can be used for any purpose. With a SEP IRA, the IRA holder is not permitted to borrow even $1 dollar from the IRA.
- With a Solo 401K Plan, you can make a real estate investment using non-recourse funds with out triggering the Unrelated Debt Financed Income Rules and the Unrelated Business Taxable Income (UBTI or UBIT) tax. However, if used a Self Directed IRA to make a real estate investment (Self Directed Real Estate IRA), using non-recourse financing would trigger the UBTI tax.
- With a Solo 401k Plan, the 401k account can be opened at any local bank or trust company. However, in the case of a SEP or a Self Directed IRA, a special IRA custodian is required to hold the IRA funds.
The Solo 401k plan is unique and so popular because it is designed explicitly for small, owner only business. The many features of the Solo 401k plan discussed above is why the Solo 401k Plan or Individual 401k Plan it so appealing and popular among self employed business owners.