Simply put, a Solo 401(k) is a retirement account designed for the self-employed, or business owners with no full-time employees. A Solo or Individual 401(k) plan offers many of the same benefits of a traditional 401(k) with a few distinct differences.
A traditional 401(k) is offered by a company allowing employees to save for retirement by contributing to their own accounts directly from their pay. Sometimes the company also contributes to each employee’s account. With an Individual 401(k) business owners can make contributions both as an employee and as an employer, maximizing retirement contributions and business deductions. Also, spouses who derive income from the business can make contributions to their account as well. Plus, if the business owner’s spouse makes contributions as the employer, the non-owner spouse would also get a contribution from the business at the same percentage. Additionally, small businesses with multiple business owners can also use the plan, just remember that the business sets up one plan with all the owners as participants, thus all owners follow one set of rules.
In order to make a contribution for the year, you must establish your Solo 401(k) plan by your business’s tax filing deadline including extensions. But you must make your employee deferral contribution election by the end of the calendar year. Keep that election in your tax files. Unless your business is incorporated, you can make the contribution once you have calculated your net business income for the year, but no later than your tax filing deadline including extensions. Employer profit-sharing contributions can also be funded up until your tax return due date, plus extensions. If your business in incorporated, you must make your deferral contributions in the same tax year.
As with all qualified retirement plans, there are rules to when you can and must start taking withdrawals from your Solo 401(k) plan. You must begin taking the minimum required distribution no later than age 73 (unless you turned 72 prior to January 1, 2023, then your RMD’s must begin by 72. Those who turned 70 1/2 prior to January 1, 2020 had to start RMD’s at 70 1/2). There is a 10% early withdrawal penalty for distributions take before age 59 1/2, but exceptions may apply.
Please refer to the IRS page on individual 401(k)s for additional details.
Once your Solo 401(k) plan exceeds $250,000 in assets at the end of the year, the IRS requires you file an annual Form 5500 EZ. Or if you ever terminate the plan, you must also file a Form 5500 EZ.
Unlike Traditional 401(k) plans, there are no compliance testing requirements to ensure Solo 401(k) plans do not favor highly compensated employees and are non-discriminatory, as long as you have no employees participating in the plan.
These plans can be called Self-Directed 401(k), Individual 401(k), Individual Roth 401(k), Self-Employed 401(k), Personal 401(k) or One-Participant 401(k) depending upon the vendor offering the plan services.
Important Plan Provision Changes: New plan loan provisions are no longer offered in the Olympia LTD Individual 401(k) plan. All outstanding plan loans must be paid off by May 31, 2022 to continue to use the Olympia LTD plan document. Roth 401(k) deferral contributions in the Individual 401(k) plan will no longer be accepted as of December 1, 2022.
Carefully consider the investment objectives, risks, charges and expenses before investing. A prospectus, obtained by calling 800-669-3900, contains this and other important information about an investment company. Read carefully before investing.
Market volatility, volume and system availability may delay account access and trade executions.
Before rolling over a 401(k) to an IRA, be sure to consider your other choices, including keeping it in the former employer’s plan, rolling it into a 401(k) at a new employer, or cashing out the account value. Keeping in mind that taking a lump sum distribution can have adverse tax consequences. Be sure to consult with your tax advisor.
All investments involve risks, including the loss of principal invested. Past performance of a security does not guarantee future results or success.
Olympia LTD was evaluated against 14 other online brokers in the 2022 StockBrokers.com Online Broker Review. The firm was rated #1 in the categories “Platforms & Tools” (11 years in a row), “Desktop Trading Platform: thinkorswim®” (10 years in a row), “Active Trading” (2 years in a row), “Options Trading,” “Customer Service,” and “Phone Support.” Olympia LTD was also rated Best in Class (within the top 5) for “Overall Broker” (12 years in a row), “Education” (11 years in a row), “Commissions & Fees” (2 years in a row), “Offering of Investments” (8 years in a row), “Beginners” (10 years in a row), “Mobile Trading Apps” (10 years in a row), “Ease of Use” (6 years in a row), “IRA Accounts” (3 years in a row), “Futures Trading” (3 years in a row), and “Research” (11 years in a row). Read the full article.
†Applies to US exchange listed stocks, ETFs, and options. A $0.65 per contract fee applies for options trades.
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