What Is A Solo 401(K)?
A Checkbook Solo 401k, also known as an individual 401(k), solo 401(k), self-employed 401(k), one-participant 401(k), and Uni(k), is a type of self-directed qualified retirement plan that is sponsored by an active business, which may be a sole-proprietorship, partnership, corporation (S-corp or C-corp), or LLC. Solo 401(k)s allow for significantly higher tax-deductible contributions and greater flexibility than IRAs by incorporating both profit-sharing and salary-deferral contributions with higher limits. Each plan participant could deduct up to $54,000 – up to $60,000 if aged 50 and over. That’s $108,000 for couples below age 50 and $120,000 for couples aged 50 and over.
Unlike IRAs, Solo 401(k) plans don’t require a qualified custodian to hold plan assets and allow the plan sponsor to be the plan trustee and administrator. Investing is as simple as opening an account in the name of the Solo 401(k) from which checks can be written to invest in the assets of your choice.
Solo 401(k) Key Features
- Deduct up to $120,000 annually
- No need for a qualified custodian
- Cost-effective administration
- Simple to manage
- Invest in alternative assets
- Borrow up to $50,000
- Pre-tax contributions
- Roth Contributions
- Contributions are discretionary
- No real estate UDFI
- Purchase Life Insurance
- Consolidate with roll-overs & transfers
Solo 401(k) contributions are completely discretionary, so adopting a plan that allows high deductions won’t obligate you to contribute annually.
Like all checkbook retirement plans, with a Solo 401k you can invest in real estate, precious metals, private loans, mortgages, merchant cash advances, asset-based lending, litigation finance, private placements and just about anything else you’d like – other than collectibles.
What are some of the special features of a Solo 401(K)?
As a qualified retirement plan, Solo 401(k)s can be drafted to include some special features. The plan can be designed to allow for loans to the plan owner of up to $50,000 – to be used for any purpose. The plan can allow for designated Roth subaccounts, thus enabling after-tax salary deferral contributions for totally tax free growth.
A Solo 401k is an ideal vehicle for leveraged real estate transactions as, unlike IRAs, it is not subject to tax on Unrelated Debt Financed Income (UDFI) resulting from non-recourse debt incurred to acquire or improve real property.
In addition to all the alternative and traditional assets that can be invested in, a Solo 401k can – subject to limitations – purchase life insurance policies using pre-tax funds.
Is a Solo 401k right for you?
If you have self-employment income of any type and have no full time employees a Solo 401k is right for you.
Even those that are employed by others and participate in a workplace sponsored retirement plan are eligible for a Solo 401k if they also have self-employment income. There are no revenue or income thresholds to qualify – so long as you’re engaged in a trade or business of any sort for the purpose of generating income you’re eligible. Once formed, you can rollover funds from other retirement accounts – except Roth IRAs – to increase the amount of investable cash in your Solo 401k and leverage its incredible power.
Having business partners does not disqualify you from sponsoring a Solo 401k. For purposes of qualifying for a Solo 401k, you cannot have non-owner employees receiving W-2 wages that work more than 1,000 hours per year and are aged 21 years and older.
In fact, employing your spouse will enable you to achieve greater tax benefits because spouses are entitled to the same deductions and contributions based on their compensation.
If you have ownership shares of other businesses that employ full-time employees the Controlled Group Rules apply and you may not qualify for a Solo 401k.
What is the process?
The process is straightforward:
1) 401kCheckBook.com designs your Solo 401k plan to give you the flexibility you want
2) We provide your plan documents naming you as trustee, IRS approval letter, and plan EIN
3) Use those documents to open an account at the financial institution of your choice
4) Fund the trust account through contributions and rollovers
5) Write checks to invest in asset classes that you choose