"Solo 401k" is a popular term used to describe the Individual 401k, one of the newest retirement plans to benefit the self employed.
The solo 401k is a self employed retirement plan that is expected to revolutionize the way many self employed business owners save for retirement due to the EGTRRA law that went into effect on January 1, 2002. When compared to other self employed retirement plans such as a SEP-IRA or Keogh, the solo 401k provides the benefit of potentially greater tax deductible contributions as well as the benefit of a tax free solo 401k loan.
A solo 401k may be well suited for the self employed business owner who would like to maximize their retirement contributions and tax deductions or who would like to borrow from their solo 401k retirement plan via a solo 401k loan.
Who can establish a Solo 401k?
The solo 401k is for self employed individuals and owner-only businesses. The business can be incorporated or unincorporated. Sole proprietors, independent contractors, C corporations, S corporations, partnerships and LLCs qualify. Partnerships that have no full time employee other than the business owners may also qualify for a solo 401k.
Businesses that have a spouse as a full time (or part time) employee also qualify for a solo 401k. In fact, if the spouse is on the payroll or receives income from the business the spouse can also contribute to the solo 401k. Provided a business owner and spouse have sufficient income, in 2015 both may be able to contribute $53,000 each ($59,000 if both are age 50+).
You can establish a solo 401k only if you have W-2 employees (other than a spouse) who work less than 1,000 hours per year. Independent contractors employed by your business would not disqualify you from establishing a solo 401k.
NOTE: The deadline for establishing a solo 401k is December 31st of the year in which you would like to receive the tax deduction or your fiscal year end.
Solo 401k Advantages
There are 2 primary advantages of the solo 401k versus other self employed retirement plans.
- Potentially greater retirement contributions at the same income level, therefore maximizing retirement contributions and valuable tax deductions.
- The option of a tax free loan using the solo 401k's balance as collateral for the loan.
Learn more about the advantages of the Solo 401k.