Discover how Solo 401(k) works
A Solo 401(k) plan, tailored for self-employed individuals and small business owners with no employees other than a spouse, allows both employee and employer contributions, significantly increasing the potential retirement savings.
This type of 401(k) offers the same high contribution limits and tax advantages as a standard 401(k) but is designed for a single participant. You can make contributions as both the employer and employee, maximizing tax-deferred growth and providing substantial tax savings.
Required documents
To establish and maintain a Solo 401(k), you will need:
- A formal plan document, which outlines the structure and operation of the plan.
- IRS Form 5500-SF if plan assets exceed $250,000 at the end of the year.
- Recordkeeping to track contributions, earnings, and investments.
Benefits of Solo 401(k) for Business Owners
- High Contribution Limits: Allows combined employer and employee contributions up to $61,000 for 2021 (or $67,500 if you are age 50 or older), significantly higher than other retirement options for individuals.
- Tax Advantages: Contributions are tax-deductible, reducing your taxable income. The plan’s earnings grow tax-deferred until withdrawal.
- Loan Options: Offers the ability to take loans up to 50% of the account balance, with a maximum of $50,000.
Important considerations
Before establishing a Solo 401(k), consider if you have any employees as the presence of employees other than a spouse may necessitate a different retirement plan. Understand the administrative responsibilities involved, including potential filing requirements and annual maintenance.
For more detailed information, please refer to the IRS publication on One-Participant 401(k) Plans.