Individual Retirement Accounts

Solo 401k

Solo 401k plans have been around for a long time, but few business owners are using solo 401k. If you're a small business owner considering the best retirement plan for your needs, then you would be ill-advised to make your choice without considering the Solo 401k or solo 401k retirement plan. A solo 401k is also known as an individual 401k or individual K.

If your small business consists of 3 or more employees, however, a solo 401k retirement plan may not be suitable for your needs.

What is a solo 401k?

A solo 401k or solo 401k plan is a retirement plan just like the individual 401k. As its name suggests, a solo 401k plan is a retirement for a business owner.

Although, not every business should open a solo 401k, the Individual 401k or Solo 401(k) plan is an extremely handy tool for the owner or owners (which includes the spouse if working at the business too) are the only employees.

Where did the solo 401k come from?

The Solo 401k is another invention brought about by the Economic Growth and Tax Relief Reconciliation Act of 2001. (EGTRRA) Because of this act, we are currently experiencing the greatest time in U.S. History for small business owners to start saving for retirement.

Benefits of solo 401k plans

The biggest reason for opening a Solo 401k plan is the higher contribution limits allowed. More specifically, contributions in a Solo 401k are based on revenue generated by the business... Meaning that you can contribute more on years that your business does better! (And who would need it the other way around?)

The default solo 401k contribution limits are great compared to 401k retirement plans and Roth IRAs. The maximum tax-deductible employer contribution in a Solo 401k is 25% of gross eligible payroll. For 2006, the maximum effective salary deferral contribution for employer plus employee was $44,000, plus a "catch-up contribution" of $5,000 for individuals age 50 and over.

Also, many Small Business owners flock to open the Solo 401k because of the flexibility offered by the solo 401k retirement plans. Loans against the Solo 401k are permitted, of course they are subject to certain limits and rules of the particular solo 401k plan. 

Finally, all necessary paperwork for the Solo 401k may just be a simple filing of the streamlined IRS Form 5500-EZ, even after plan assets exceed $100,000.