Solo 401k’s, also called individual 401k’s, one participant 401k’s, or self-employed 401k’s are basically the same as regular 401k’s. That is, the business owner can make a 401k contribution up to the lesser of $23,000 or 100% of compensation. People age 50 and older can contribute an additional $7,500 under the 401k catchup provision, bringing total contributions to $ 30,500. The difference between a Solo 401k and a regular 401k is that Solo 401k’s cover only business owners and their spouse, if their spouse is employed by and receives compensation from the business.
Most Solo 401k’s plans allow for profit sharing as well as 401k contributions. Profit sharing contributions are employer contributions allocated to participants according to a formula contained in the plan document. From the business owner’s standpoint, both profit sharing and 401k contributions serve the same purpose, which is to reduce taxable income and thereby taxes. Both types of contributions have their own limits. 401k contributions are subject to the $23,000 or the $30,500 dollar limits, while profit sharing contributions cannot exceed 25% of eligible payroll. For Solo 401k’s eligible payroll is the business owner’s compensation and their spouse’s compensation if employed by the company.
By combining 401k and profit sharing contributions the employer may be able to contribute more than by making either contribution alone. For example, a company owner age 51 earns $90,000 for the year and wants to max out their retirement plan contributions for the year. The calculations would be as follows:
- X .25
- $ 22,500
- + 23,000
- + 7,500
- Annual Compensation
- Profit sharing deductible limit
- Profit sharing contribution
- 401k Contribution
- 401k Catch up contribution
- Total contribution
This example is for illustrative purposes only. Depending on the legal structure of the company, actual contributions could be different. 401k Contributions must be made prior to the end of the plan year, which in most cases, is December 31. Profit sharing plan contributions can be made up until the time the employer files their business income tax returns including extensions.
Another advantage of Solo 401k’s is that it allows people age 50 and over to exceed the annual additions limit, which for 2024 is $69,000. The annual additions limit is the maximum contribution a plan participant can receive in a given year under a defined contribution plan. The $7,500 401k catch up provision, however, is not subject to this limit which brings the total contributions to $76,500, for those who qualify.
Solo 401k’s are simple to administer. They don’t entail a lot of record keeping and Form 5500 doesn’t even have to be filed until plan assets reach $ 250,000. Form 5500 is the plans tax return which in most cases must be filed each year. While not required, we file Form 5500 for Solo 401k’s plans with less than $ 250,000 in assets and we don’t charge extra for this service. We do this because as time goes by some employers forget about the filing requirements and never file a Form 5500 even when they are required to do so. The penalties for failure to file Form 5500 in a timely manner can be extremely harsh. Our position is why take the risk, particularly when it takes only a few minutes to prepare a 5500 for a Solo 401k.
The Solo 401k’s plan service that we provide includes the following:
- Plan design and ongoing consulting
- Plan document along with unlimited free updates for legislative changes.
- Complete plan administration including record keeping, annual participant statements, testing, contribution calculation and allocation and Form 5500 preparation.
- With business owners who employ their spouse, we will help develop strategies to maximize family tax savings and accumulation potential
In short, we provide everything that you need to establish and maintain your Solo 401k plan.
Cost for Services:
|Annual Administrative charge:
|Business owner only $500
Business owner and spouse $650
Solo 401k Plan
To learn more about solo 401k plan call us at 800-640-3895 or complete the response form below.