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Self-Employed: Is a Solo 401K Plan an Option?

Posted by Traci A. Malik Posted on Aug 22 2017
Self-employed business owners have several choices when it comes to retirement plans.  They can set up a Simple IRA, SEP IRA or the one-participant Solo 401K plan.  Most owners opt for either the Simple IRA or the SEP IRA, but they should consider setting up a Solo 401K plan for more retirement and tax savings if they have no employees.  In a Solo 401K plan, the business owner is both employee and employer.  Contributions can be made to the plan in both capacities.    

Solo 401K plans are either elective or non-elective.  The "elective" plan means you do not have to contribute each year, you decide when to contribute.  The "non-elective" means you are required to contribute according the plan.  Traditional 401K plans have vesting, which means that the company makes contributions to the employees account, but the employee is not 100% vested or entitled to the funds until they have been with the company for a specific period of time according to the plan documents.  In a Solo 401K the self employed owner becomes 100% vested immediately.

For 2017 the maximum employee contribution to a Solo 401K plan is $18,000 and if over the age of 50 there is a catch-up contribution of $6,000 for a total of $24,000.   In addition to that, the employer can make a non-elective profit sharing contribution of up to 25% of your pay which is based on your W-2 or 20% based on sole proprietorship or single member LLC.  The combined maximum contribution for 2017 is $60,000 including catch-up contribution. 

Below is an example of Sole Proprietor, age 45, set up an single member LLC- no W2, reports business income on Schedule C 1040:
Business net income $150,000
Solo 401K contribution (owner/employee)  maximum    $ 18,000
Company non-elective profit sharing (20%)                  $ 30,000             
Total contribution                                                       $ 48,000
Example - Sole Shareholder, age 45, operating as an S Corporation, no other employees, payroll W-2 $100,000 and net income for the year $50,000:
Solo 401K contribution (owner/employee)  maximum   $18,000
Company non-elective profit sharing (25%)                 $25,000             
Total contribution                                                      $42,000

If the company has other employees, the Solo 401K plan is not an option and the business owner would need to consider other plans such as Simple IRA, SEP IRA or a traditional 401K plan. 
Jones & Company CPAs P.A. provides services in tax and retirement matters and have offices in the Trinity and New Port Richey area as well as Lutz and Land O Lakes.  Please feel free to contact us at 727.845.4166.