Solo 401(k)
A Guide to 401(k) for the Self-Employed
A solo 401(k) is a retirement savings plan for a self-employed or sole proprietor business owner (and spouse, if applicable). This individual 401(k) plan goes by different names including self-employed 401(k), Individual 401(k), or one-participant 401(k).
A solo 401(k) plan provides all the benefits of a big business 401(k) plan. Business owners can maximize their retirement contributions, and both contributions and plan expenses are tax deductible.
Who qualifies for a solo 401(k) plan?
A self-employed business owner must have earned income from self-employment to contribute to a solo 401(k). Self-employment can take any form; however, it does not have to be a full-time business venture.
For example, an individual may work full time for an employer and have their own business on the side.
Any income earned from the side business would be eligible to contribute to a solo 401(k) plan.
The business establishing the solo 401(k) can be structured as a sole proprietorship, partnership, or corporation. A one-participant 401(k) plan is intended for a business without any employees or a business with employees who are not eligible to participate in a 401(k) plan—for example, those who work fewer than 1,000 hours per year or who are younger than age 21.
Benefits of 401(k) for self-employed
A business owner has the best of both worlds with a solo 401(k). They have the flexibility to contribute as much as they want from year-to-year (up to the standard limits), plus, they do not have to worry about limiting their salary deferrals based on failed nondiscrimination tests caused by employees with low savings rates. They also get all the benefits of a big business 401(k), such as tax deductions and loans.
Solo 401(k) benefits
Reduced taxable income for pre-tax salary contributions
Ability to make after-tax Roth contributions
Business tax deduction for plan contributions and plan expenses
Pre-tax growth on investments while in the plan
Option to take a loan from retirement savings
Higher contribution limits than SEP or SIMPLE IRA plans
Because there are no employees, plan administration is extremely low maintenance. There are no nondiscrimination tests, and business owners are not required to file annual reports with the IRS until the plan reaches $250,000 in assets.
Self-employed 401(k) contribution limits
Because there are no employees, plan administration is extremely low maintenance. There are no nondiscrimination tests, and business owners are not required to file annual reports with the IRS until the plan reaches $250,000 in assets.
Solo 401(k) deadline
Self-employed 401(k) rules
A solo 401(k) plan follows most of the same rules as a regular 401(k) plan, with a few exceptions.
Pre-tax and Roth contributions
Eligibility requirements
Coverage and nondiscrimination tests
Reporting and disclosures
Solo 401(k) vs. SEP IRA
A Simplified Employee Pension (SEP) plan is an IRA-based retirement savings plan also designed for small business owners.
A SEP IRA plan is easy to administer and allows a business owner to make tax-deductible contributions up to 25% of taxable compensation (maximum of $61,000 for 2022). Although the annual limit is the same as a solo 401(k) plan, a business owner would need a higher level of taxable compensation to make the $61,000 maximum SEP contribution as compared to a solo 401(k) contribution.
Moreover, the SEP plan does not have the age 50 catch-up contribution feature which could boost savings to $67,500 for 2022.
Learn More
If you are a small business owner and need a 401(k) plan for yourself and your company, we can help.
Setting up a 401(k) can be complicated.The 401(k)ompany gives small business owners access to 401(k) professionals in addition to plan providers with low flat-fees. Each sales professional has over a decade of experience assisting business owners in 401(k) plan design.
Additional resources for solo 401(k)
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© 2019 The 401(k)ompany
200 East Broward Blvd. Suite 1320
Fort Lauderdale, FL 33301
Support: 888.667.4750
© 2022 The 401(k)ompany, All rights reserved.
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