Retire Smarter with a Solo 401K

What’s a Solo-K and how does it work?

• The presence of self-employment activity.
• The absence of full-time employees.

Contribution Limits of a Solo-K

Elective Deferrals

Employer Contributions

How to Calculate Your Solo-K Contribution

1. Determine Your Net Self-Employment Income: This is your total income from self-employment activities minus any allowable business expenses and deductions. It forms the basis for your contribution calculation.
2. Calculate Your Elective Deferrals: Individuals under 50 can contribute up to $19,500 in elective deferrals to their Solo 401(k). If you're 50 or older, you're eligible for higher-up contributions of up to $6,500. However, the total elective deferral limit is $26,000.
3. Calculate Your Employer Contributions: You can contribute up to 25% of your net self-employment income if you operate as a sole proprietorship or single-member LLC, or 20% if your business is structured as a corporation or multi-member LLC.
4. Combine Elective Deferrals and Employer Contributions: Add your elective deferrals to your employer contributions to determine your total Solo 401(k) contribution for the year. Make sure this total does not exceed the annual contribution limits set by the IRS.
5. Submit Your Contribution: Once you've calculated your contribution, you can contribute to your Solo 401(k) account. You have until the tax filing deadline, which is on April 15 of the following year, to make contributions for the current tax year.

What are the advantages of a Solo-K?

• Higher Contributions— Make annual contributions up to $54,000 with an additional $6,000 catch-up contribution for those over age 50.
• Tax-And Penalty-Free Borrowing— Borrow up to $50,000 or 50% of your account value (whichever is less) for any purpose. You must pay back loans within 5 years.
• Checkbook Control— 100% checkbook control over your retirement funds. Use what you need, when you need it. Simply write a check.
• Easy Administration— You are the trustee of the plan.
• Expanded Investment Options— You can invest in real estate, private lending, limited liability companies, precious metals, and more!
• Exemption from UDFI— With a Self-Directed Solo 401k plan, you can use leverage to purchase real estate, which may be exempt from UDFI rules and UBTI tax.
• Consolidate Accounts— You can transfer most of your other retirement accounts into your Solo-K. This includes you 401k from another employer, SIMPLE IRA, SEP IRA, 403(b), 457(b) or Traditional IRA). You cannot transfer existing Roth funds.

Potential Drawbacks of a Solo-K

• Complex Setup: Establishing a Solo-K can be more complex and time-consuming than other retirement plans, especially if you want to take advantage of its checkbook control and expanded investment options.
• Administrative Responsibilities: As the trustee of the plan, you are responsible for ensuring compliance with IRS regulations, including filing annual reports, maintaining accurate records, and following contribution limits.
• Contribution Requirements: Higher contribution limits are advantageous but require consistent cash flow to maximize contributions. If your income fluctuates, meeting the contribution requirements may be challenging.
• Limited Eligibility: Solo-Ks are designed for self-employed individuals or small business owners with no full-time employees (except for a spouse). If your business grows and you hire employees, you may need to switch to a different retirement plan.

Solo-K FAQs

Which is/are the best type/s of retirement plan for SMB owners?

Am I allowed to borrow from a SEP IRA, SIMPLE IRA, or 401(k)?

How much can an SMB owner contribute to a 401(k)?

Are there compliance regulations for offering my employees a 401(k)?

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