It’s the American Dream of millions – “to be your own boss.” And after the Financial Crisis of 2008, more people than ever have been deciding to make that happen. With the number of self-employed U.S. workers (now at 15 million) expected to almost triple to 42 million by 2020 – now is the ideal time to break down the advantages of the Solo 401(k). After all, “the boss” has to be in charge of his or her retirement planning too!
ELIGIBILITY. There are limits on who can qualify, such as the business has to consist of an individual or an individual and spouse. Those who work for an employer with a retirement plan and do free-lance work on the side may not be eligible for a Solo 401(k).
INCREASED SAVING. If requirements are met and self-employment income is in the five-figure range, a Solo 401(k), aka an individual 401(k), allows self-employed workers to set aside more money than the more commonly used SEP-IRA does. The Solo 401(k) allows tax-deferred contributions for retirement, as of 2018, up to $55,000 annually. Much like a traditional or Roth 401(k), $18,000 can be put aside for retirement through a salary deferral; and, as of 2018, $24,500 for persons 50 and older. Here’s the twist. With the Solo 401(k), 25% of compensation can be added up to the $55,000 cap for quicker savings.
LOAN OPTIONS. The Solo 401(k) loan option, which is not available with SEP or Simple IRAs, allows for a loan limit up to 50% of an account’s value, not to exceed $50,000. The loan proceeds can be used for any purpose. Solo 401(k) participants can also borrow up to $50,000 to fund or inject money into a business or to make an investment.
DIVERSE INVESTING. Solo 401(k) plans allow a variety of investment options for greater diversification from the average investor’s portfolio. In addition to stocks and bonds, alternative Solo 401 (k) investments options include real estate, precious metals, life insurance, private business, private equity & debt and much more. There are some investment choices that may be off-limits so it’s wise to ask a professional if your desired investment is allowed and what rules might apply.
ROLLOVERS WELCOME. A Solo 401(k) plan can accept rollovers of funds from other retirement savings accounts, such as an IRA, a SEP, or a previous employer's 401(k) plan. Only Roth IRA funds cannot be rolled into a Solo 401(k) plan.
TAX PERKS. In comparison to other retirement accounts, the Solo 401(k) is relatively easy to administer. It is not subject to Form 5498 like SIMPLE and SEP IRAs, and it allows self-employed business owners to serve as their own trustees if so desired. The Solo 401(k) does not require the filing of tax forms unless a distribution is made or the total account value exceeds $250,000. If involved in real estate investment, the Solo 401(k) is exempt from payment of unrelated debt-financed income tax (UBIT or UDFI).
As with any retirement investment account, there are a number of things to consider when choosing a savings vehicle, and a fair amount of fine print to digest. At Tax Savings Professionals, we’ve answered financial and tax planning questions for thousands of clients over the past 18 years; and we are here to help you. Call us at (772) 257-7888 or click on our contact form today.
