Solo 401(k) – A Great Idea for the Self-Employed

Posted on December 12, 2017 · Posted in Retirement Planning

(AKA – Self Employed 401(k) or Individual 401(k)).

Who Qualifies

  • Employers with no full-time employees other than the business owner(s) and their spouse(s).
    • Full-time employee is generally defined as one who works at least 1,000 hours per year for his/her employer.
    • Certain employees may be excluded from plan eligibility. For example, employees under the age of 21.
  • Individual must claim some self-employed income.
    • He/she does not need to work full-time in a self-employed capacity.
    • A Solo 401(K) Plan can be adopted by any self-employed business, including a sole proprietorship, limited liability company, partnership, C-Corporation, S-Corporation etc.

Contribution Limits

Same as a standard ERISA 401(k).

  • Profit sharing contribution which comes from the employer.
    • Employer contributions is limited to 25 percent of the entity’s income.
    • Income is defined by that which is subject to self-employment tax.
  • Salary deferral contribution which comes from the employee.
    • Lessor of self-employed income or $18,000.
    • If you are over 50, you may also contribute the $6,000 catch-up.

However, since you are both employer and employee, the actual percentages can be affected by how your business is legally structured (i.e. LLC, C-Corporation, S-Corporation).  The IRS has declared an upper limit for total employer and employee contributions to a plan which may not be exceeded. For 2017, this upper limit is $54,000 for those under 50 and $60,000 for those 50 and older

Solo 401(k) versus SEP IRA

  • Solo allows catch-up contributions, SEP does not.
  • Easier to hit maximum contribution with Solo through Salary Deferral component.
  • Solo is easier to setup as it does not need special custodian.

Although the Solo 401(k) is easy to setup, it must be done by year end.  Employee Contributions must also be made by year end, but Employer Contributions can wait until tax time.

While we have made every attempt to ensure that the information contained on this page is accurate and from reliable sources, Shoreline Financial Advisors is not responsible for any errors or omissions, or for the results obtained from the use of this information. All information in this site is provided “as is”, with no guarantee of completeness or accuracy.  In no event will SFA be liable for any decision made or action taken in reliance on the information in this blogpost.  We recommend the use of a Registered Investment Advisor for the establishment and implementation of a Solo 401(k) plan.

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