The Solo 401(k)
BY DAVE RAO
A RETIREMENT INVESTMENT VEHICLE DESIGNED FOR THE
SELF-EMPLOYED
DO YOU WORK for yourself? Then you may want to consider
the solo 401(k), which marries a traditional employee retirement
savings account to a small-business, profit-sharing plan. To have
a solo 401(k), you must either be the lone worker at your business
or its only full-time employee.
1
Boost your retirement savings strategy. With a solo 401(k),
you may be able to ramp up your retirement savings and man-
age your tax bill at the same time. Remember, distributions
from 401(k) plans are taxed as ordinary income, and if taken
before age 59 1/2, may be subject to a 10% federal income tax
penalty. Generally, once you reach age 72, you must begin tak-
ing distributions.
As an employee, you can defer up to $19,500 of your
compensation into a solo 401(k) in 2020. Since catch-up
contributions are allowed for the solo 401(k), the yearly limit is
$26,000 if you are 50 or older.
2
As an employer, the maximum amount a self-employed
individual can contribute to a solo 401(k) for 2020 is
$57,000, if they are younger than age 50. Individuals 50 and
older can add an extra $6,500 per year in "catch-up" contribu-
tions, bringing the total to $63,500. Whether you're permitted
to contribute the maximum, though, is based on a variety of
factors, including your self-employment income.
3
Are you married? If your spouse earns income from the
business, then they can potentially make an employee contribu-
tion to the plan.
4
You can "go Roth" with your solo 401(k). The annual
employee contribution limits for a Roth solo 401(k) are the
same as those for a traditional 401(k): $19,500 for individuals
under 50, and $26,000 for individuals 50 or older. Only employee
contributions can be Roth contributions, however.
The administration duties for a solo 401(k) plan may be
relatively light. There are no compliance testing requirements.
You need to file an annual Form 5500 with the IRS when the
assets in your solo 401(k) exceed $250,000.
5
Solo 401(k)s give the small-business owner increased
retirement savings potential. These plans are relatively easy
to create, and you are free to have one whether your business is
a sole proprietorship, S corporation, C corporation or limited
liability company (LLC). n
Dave B. Rao is the founder of R AO Wealth Partners. He focuses
his practice on helping to advise physicians, corporate executives
and business owners on their unique financial situations. For
more information, visit raowp.com.
Our firm does not render legal or tax advice. This article was written for our
firm and provided courtesy of MarketingPro. Investments in securities and
insurance products are NOT FDIC-INSURED/NOT BANK-GUAR ANTEED/
MAY LOSE VALUE. Rao Wealth Partners is an independent firm. Securities
offered through Cetera Advisor Networks LLC., member FINR A and SIPC.
Advisory services are offered through Summit Financial G roup, Inc., a
registered investment adviser. Client Assets held at First Clearing, LLC (a
wholly owned Wells Fargo Subsidiary). Summit and Cetera are affiliated
are under separate ownership from any other named entity.
Citations
1. irs.gov/retirement-plans/one-participant-401k-plans (11/13/2020)
2. irs.gov/retirement-plans/one-participant-401k-plans (11/13/2020)
3.
kiplinger.com/article/retirement/t001-c000-s001-how-much-can-
you-contribute-to-a-solo-401-k-2020 (2/24/20)
4. irs.gov/retirement-plans/one-participant-401k-plans (11/13/2020)
5. nerdwallet.com/blog/investing/what-is-a-solo-401k/ (11/15/20)
The Solo 401(k)
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