Solo 401(k) – The best
max your contributions to a deductible retirement account
The Solo 401 (k) is a
self-employed retirement plan that gives flexibility of contribution
and highest contribution limits but requires some amount of detailed
paperwork. Changes in tax laws have altered the Solo 401 (k) in
several ways. Today, the plan offers bigger deductible annual
contributions helping you consolidate a big tax-deferred retirement
account balance while keeping your annual income tax bill low. It is
an ideal plan for the self-employed who have no employees. You have
an exception there if the only other employee is your spouse.
How to set up a Solo
You could set up a Solo
with the help of any financial institution. You could opt for the
traditional or Roth structure depending upon whether you want
tax-deferred growth or tax-free growth. The paperwork would include
filling up an application, forms for company information and
What are the advantages
of a Solo
The main advantage of this
Plan is that
the limit on deductible contributions is high all the way to even 100
per cent of the net earnings up to $16,500 ($22,000 if you are older
than 50). You can also contribute another component or the
profit-sharing amount of up to 25 per cent of your compensation
income or 20% of your self-employment income. However, if you have
employees then you are required to contribute to their account as
well which requires paperwork and is better done with the help of a
professional tax consultant.
Can you take a loan
Solo 401 (k) account?
One of the most popular
self-employed people go for the Solo 401(k) is the option to take
pre-retirement loans. This option is set up with the help of a form.
Most businesses also qualify for a tax credit of up to $500 to take
care of up to 50 per cent of the cost of setting up and administering
the account in the first three years. People who have a business and
a day job could also contribute to their regular retirement account
at their workplace and to their solo 401 (k) account.
Most businesses that qualify
for a Solo
401 (k) plan also qualify to take a tax credit of up to $500 to cover
up to half the cost of setting up and administering the plan in each
of its first three years.
What is the penalty on
If you withdraw money from
before the age of 59 years and six months then you have to pay a 10
per cent penalty. However, there are some exceptions which include:
permanent disability of account owner, death of account owner, for
non-reimbursed medical expenses (if expenses are in excess of 7.5% of
your adjusted gross income), for first-time home purchase, for higher
education costs and medical insurance premium.
What is the last date for
a Solo 401(k)?
A Solo 401(k) must be
the end of the tax year which is December 31. The last date for
funding the Plan depends upon how the business has been set up -
incorporated or unincorporated. Also, every component of the Plan
contribution could have a separate last date. The last date varies
from the ending of the tax year to the extended due date of the tax