Solo 401(k) Plan Details
The Ultimate Retirement Investment Solution
A Solo 401(k) 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 individual 401(k) Plan is not a new type of plan. It is a traditional 401(k) plan covering only one employee. Unlike a Traditional IRA, which only allows an individual to contribute $5500 annually or $6500 if the individual is over the age of 50, a Solo 401k Plan offers the Plan participant the ability to contribute up to $59,000 each year. Before the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) became effective in 2002, there was no compelling reason for an owner-only business to establish a Solo 401(k) Plan because the business owner could generally receive the same benefits by adopting a profit sharing plan or a SEP IRA. After 2002, EGTRRA paved the way for an owner only business to put more money aside for retirement and to operate a more cost-effective retirement plan than a Traditional IRA or 401(k) Plan.
There are a number of options that are specific to Solo 401(k) plans that make the Solo 401(k) plan a far more attractive retirement option for a self-employed individual than a Traditional IRA for a self-employed individual.
- Maximize Your Retirement Nest Egg
A Solo 401(k) Plan includes both an employee and profit sharing contribution option, whereas, a Traditional IRA has a very low annual contribution limit.
Under the 2016 Solo 401(k) contribution rules, a plan participant under the age of 50 can make a maximum employee deferral contribution in the amount of $18,000. That amount can be made in pre-tax or after-tax (Roth). On the profit sharing side, the business can make a 25% (20% in the case of a sole proprietorship or single member LLC) profit sharing contribution up to a combined maximum, including the employee deferral, of $53,000.
For plan participants over the age of 50, an individual can make a maximum employee deferral contribution in the amount of $24,000. That amount can be made in pre-tax or after-tax (Roth).
On the profit sharing side, the business can make a 25% (20% in the case of a sole proprietorship or single member LLC) profit sharing contribution up to a combined maximum, including the employee deferral, of $59,000. Whereas, a Traditional IRA would only allow an individual with earned income during the year to contribute up to $5500, $6500 is the individual is over the age of 50.
- Open Architecture Plan
Our Solo 401(k) Plan is an open architecture, self-directed plan that will allow you to make traditional as well as nontraditional investments, such as real estate by simply writing a check. As trustee of the Solo 401(k) Plan, you will have "checkbook control" over your retirement assets and make the investments you want when you want.
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.
- Borrow-Up to $50,000 Tax-Free
With a Solo 401K Plan you can borrow up to $50,000 or 50% of your account value, whichever is less. The loan can be used for any purpose. With a Traditional IRA, the IRA holder is not permitted to borrow even $1 dollar from the IRA without triggering a prohibited transaction.
- Buy Real Estate with Leverage Tax-Free
With a Solo 401(k) Plan, you can make a real estate investment using nonrecourse funds without triggering the Unrelated Debt Financed Income Rules and the Unrelated Business Taxable Income (UBTI or UBIT) tax (IRC 514). However, the nonrecourse leverage exception found in IRC 514 is only applicable to 401(k) qualified retirement plans and does not apply to IRAs. In other words, using an IRA to make a real estate investment (Self Directed Real Estate IRA) involving nonrecourse financing would trigger the UBTI tax.
- No Need to Establish an LLC
With a Solo 401(k) Plan, the plan itself can make real estate and other investments without the need for an LLC, which depending on the state of formation could prove costly. Since a 401(k) plan is a trust, the trustee on behalf of the trust can take title to a real estate asset without the need for an LLC.
- Strong Creditor Protection
In general, a Solo 401(k) Plan offers greater creditor protection than a Traditional IRA. The 2005 Bankruptcy Act generally protects all 401(k) Plan assets from creditor attack in a bankruptcy proceeding. In addition, most states offer greater creditor protection to a Solo 401(k) qualified retirement plan than a Traditional IRA outside of bankruptcy.
- Easy Administration
With a Solo 401(k) Plan there is no annual tax filing or information returns for any plan that has less than $250,000 in plan assets. In the case of a Solo 401(k) Plan with greater than $250,000, a simple 2 page IRS Form 5500-EZ is required to be filed. The tax professionals at the IRA Financial Group will help you complete the IRS Form.
- IRS Audit Protection
The Solo 401(k) Plan is an IRS approved qualified retirement plan. Our Solo 401(k) Plan comes with an IRS opinion letter which confirms the validity of the plan and is a safeguard against any potential IRS audit.
- Roth After-Tax Benefit
A Solo 401k plan can be made in pre-tax or Roth (after-tax) format. Whereas, in the case of a Traditional IRA, contributions can only be made in pre-tax format. In addition, a contribution of $18,000 ($24,000, if the plan participant is over the age of 50) can be made to a Solo 401(k) Roth account.
The Solo 40IK Solution
A Solo 401k Plan offers a self-employed business owner the ability to use his or her retirement funds to make almost any type of investment, including real estate, tax liens, private businesses, precious metals, and foreign currency on their own without requiring custodian consent tax-free! In addition, a Solo 401k Plan will allow you to make high contributions (up to $59,000) as well as borrow up to $50,000 for any purpose.
Have an investment opportunity, such as real estate or a business investment that you would love to make with your 401k funds?
Want the ability to make high tax-deductible or Roth contributions?
Need to access up to $50,000 of your retirement funds for personal use?
Then the Solo 401k Plan is your solution!