Solo 401(k) Plan

One of the most beneficial retirement plans for a single owner/employee business is the Solo 401(k) Plan.

What is a Solo 401(k) Plan?

A Solo 401(k) Plan is a qualified defined contribution plan similar to a company’s 401(k) Plan. However this plan is designed specifically for a business owner with self-employment income and no employees. An exception is if the business also employs the spouse of the owner/employee. This plan allows the owner/employee to defer compensation into the plan as well as funding a profit sharing contribution on behalf of the owner/employee. The owner/employee can elect to defer his/her compensation on either a pre-tax or after-tax basis, also known as Roth 401(k) contributions. The manner in which the compensation is deferred determines whether the earnings of the plan are on a tax deferred (Traditional) or tax free basis (Roth).

How much can I contribute to a Solo 401(k) Plan?

The amount you can contribute to a 401(k) plan may vary from year to year depending on the guidelines set forth by the Internal Revenue Service. For 2012, the maximum contribution an employee can defer into a 401(k) plan is $17,500 (indexed). This limit is per taxpayer therefore any 401(k) contributions withheld on behalf of the taxpayer by any employer must be aggregated to ensure the taxpayer does not exceed applicable limits each tax year.

For taxpayers who have attained age 50 or older, a catch-up contribution is allowed each year into the plan. Similar to a 401(k) deferral limit, the catch-up contribution limit may change from year to year. For the 2012 plan year, the catch-up contribution is $5,500, thus a total of $22,500 is allowed for an individual age 50 or older.

In addition to the deferral of compensation by the owner/employee, an additional profit sharing contribution can be made on behalf of the owner/employee by the company. The maximum contributions allowable to the plan on an aggregate basis (deferral plus profit sharing) cannot exceed $50,500 ($55,500 if age 50 or older) for 2012.

An example of contributions to a Solo 401(k) plan would be as follows:

An owner/employee with no employees has Schedule C income on his Form 1040 in the amount of $50,000. The owner/employee, who is age 55, defers $22,500 into the 401(k) portion of the Solo 401(k) plan. In addition, the company funds a profit sharing contribution in the amount of $12,500 (25% of compensation) to the Solo 401(k) plan on the behalf of the owner/employee for total plan contributions of $35,000. The entire contribution of $35,000 will be allowed as a deduction on the owner/employee’s Form 1040.

How does an employee receive their money from the plan?

Employees can receive a distribution from the plan in a number of ways. Funds can be received via plan loans, hardship distributions, in-service distributions, required minimum distributions or distributions due to termination or retirement. Of course, the preferred distribution would be due to retirement. The provisions of the plan set forth by the employer will explain the options for receiving a distribution from the plan.

What is required to administer a Solo 401(k) Plan?

A Solo 401(k) plan is required to have a written plan document. This document is drafted by your third party administrator and executed by the owner/employee. In addition to the plan document, the plan is required to file a Form 5500 each year the plan assets are in excess of $250,000. This return can be filed either electronically or via mail with the Internal Revenue Service by the owner/employee or the third party administrator. In addition to the annual filing, our firm provides annual account summary information and maximum plan contributions to the owner/employee.

What are the first steps to getting a 401(k) plan started?

If you are interested in exploring a Solo 401(k) plan, please contact Resource Benefits Administrators at (254) 776-6214 or (512) 342-1652 and a representative will assist you with your questions and the procedures needed to get your plan established.

3415 Greystone Drive, Suite 205
Austin, Texas 78731
(512) 342-1652
5400 Bosque Blvd, Suite 500
Waco, Texas 76710
(254) 776-6214

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