401(k) plans have long been thought of as retirement plans for large companies. While there is no minimum number of employees required to establish one, the high costs associated with setting up a 401(k) and administering it have made them unappealing to small businesses. However, one-person businesses may want to reconsider…
How is a 401(k) plan for a one-person business different from one for a large company? Solo 401(k) plans are designed specifically for one-owner businesses where the owner is the sole employee and are less complex, less burdensome and less costly to manage.
How is a solo 401(k) plan simpler? Since it only covers one person, the complex 401(k) rules on coverage and nondiscrimination do not apply.
Are lower costs and simpler administration the only benefits of a solo 401(k) plan? No. Depending on your earnings, you may be able to contribute more to a 401(k) plan than another plan.
How much can an individual contribute to a solo 401(k) plan? You can elect to contribute up to 100% of your earnings, but this is subject to a specified annual limit. If you’re 50 or older, you can also make additional catch-up contributions.
Are the contributions tax deductible? These contributions are called elective deferrals and are excluded from your taxable income rather than deducted from it. Contributions are subject to social security tax, but not income tax until you withdraw money from the account.
How much can the business contribute to the plan? Your business can make tax-deductible contributions to your account for up to 25% of your wages or 20% of net self-employment earnings. There is a yearly dollar limit for combined contributions that you and your business can make each year.
Does the business need to be a corporation in order to have a 401(k) plan? No.
Can you borrow money from a solo 401(k)? Yes. 401(k) plans allow you to borrow as much as 50% of the balance in your account, up to $50,000.
If you have retirement money in other plans, can you roll it over into your solo 401(k) plan? Yes.
Are there any disadvantages to a solo 401(k) plan? Yes. As your company grows and you hire employees, your 401(k) plan must also cover them which then subjects your plan to the complex rules and costly administration of a regular 401(k) plan.
Not sure if a solo 401(k) plan is right for you? Contact us today!