Solo 401k – Defined and Eligibility

Perfect for the Business Owner that has no common law employees!

The Solo 401k (self-directed) is a plan that can be utilized by a sole proprietor, partnership, S-Corp or C-Corp. It is a retirement plan that allows the business owner with no common law employees the ability to contribute to their plan at the highest levels (based on corresponding income) and invest those funds into traditional and non-traditional assets…all from one account.

Solo 401k Contributions

The Solo 401k is generally an individual’s “go to” over a SEP IRA, SIMPLE IRA or any other IRA product. It allows the highest amount of contributions with the least amount of income. Your contributions to your Solo 401k plan can include:

Rollover contributions;

Elective Deferral contributions (both Traditional and Roth);

Roth Conversions; and,

After-Tax Contributions

Solo 401k Loans

Some company plan documents do not offer the ability to take 401(k) participant loans. Your documents sponsored through PGI will permit you to exercise loans up to the fullest degree of what the IRS permits. To qualify for a participant loan:

Your plan documents must provide you the ability to do so (your documents will);

Your loan can be up to 50% of the account balance or $50,000, whichever is less. As an example, if you had an FMV account balance of $100,000 or more, your maximum loan could be $50,000. If your account balance was $80,000, the maximum loan amount would be $40,000.

Unless the loan is for a primary residence, your loan is limited to a period of 5 years;

Your loan must be repaid on a quarterly repayment schedule of amortized principal and interest;

Loan interest must be legitimate….at least the prime interest rate at the time of the loan plus an additional 1% (if prime was 4%, you would need to charge yourself at least 5%)

Do I Qualify for a Solo 401k?

In general, it is very easy to qualify as self-employed. As long as you have a legitimate business with the intent of generating income/profit, and meet the two following eligibility requirements:

Part-time or full-time self-employment activities; and,

No presence of any common-law, full-time employees (other than a spouse or business partner).

Exceptions where one would not be considered a common-law employee:

Employees under the age of 21;

Employees who are working less than 1,000 hours per year; and,

Legitimate usage of 1099 independent contractors

Don’t Play Games…follow the rules!

In many cases, we often feel the IRS “taketh away.” Here is one situation where the IRS give tremendous flexibility…so don’t play games by saying you are self-employed when you really are not. It doesn’t take much for your business to sponsor a Solo 401k. Whether you are a sole proprietor, LLC, S-Corp, C-Corp or partnership, you are able to have your business sponsor your plan provided:

You are operating your business with the intent and business practices of earning income. Please note, the IRS does not necessarily require you to earn income (many businesses lose money/don’t generate earned income after deductions), but they do require you to be an active business vs. a passive business. Because the IRS does not require a certain amount of earned income, there is also no provision that a participant must contribute to their 401(k). In short, life happens and while your business may be able to sponsor your plan, your business may not generate enough income to make a contribution.

Examples

  1. Patti is a self-employed realtor, earns 1099 commission earnings from her real estate sales, has no common law employees and files her income on the Schedule C of her 1040 tax return. Qualifies for a Solo 401k.
  2. Vickie works as a W-2 employee for the county government. She doesn’t even think she is self-employed. However, she makes quilts and sells them throughout the year. Vickie has activity, income and a product. Provided she correctly includes the income on her 1040 tax return, she does qualify for a Solo 401k.

IRS Resource Material for the Self-Employed — https://www.irs.gov/pub/irs-pdf/p560.pdf