Even with the advent of Solo-K plans, it seemed as though many CPAs still recommended their self-employed clients to create a SEP-IRA (self-directed or not), rather than a Solo-K. Sure, in the early years, many CPAs were probably not aware of the plans, few maybe knew how they were to be operated and administered and, quite possibly, more suggested the SEP-IRA….because it was the path of least resistance.
However, almost in all cases, the Solo-K outshines any other similar plan. Both in overall benefits and, specifically with new contributions. The SEP-IRA does not compare to the Solo-K in not only benefits but also contributions limits.
I have found that sometimes the best manner in explaining how the self-employed individual makes contributions is to create the visual of two (and possibly 3 for some individuals) buckets for contributions. Most, but not all, Solo 401(k) plans can and should have at least two these three buckets.
Think of the contributions that you personally make. Most of us have, at one time or another, worked in a W-2 job where we either made 401(k) contributions or at least were made aware of this opportunity. If you made these contributions from your paycheck, these are what is called elective deferrals. In most employer plans, you have the contributions deducted from your paycheck before taxes (pre-tax) which results in a reduction in your taxable income.
Being self-employed, you have the same ability to make these elective deferrals to your Solo-K. Just like that old W-2 401(k) plan, you can make these elective deferrals.
Any Business Type Permitted
One confusing aspect for some is that they understand that if their self-employed business provides them with payroll, that visual is easy to follow. They may have a little more difficulty understanding how a self-employed individual person, with no payroll, “deductions” for these elective deferrals. We will address this more later.
Bottom line: Regardless of whether you are a sole proprietorship or any other business structure, you will be able to make Elective Deferral contributions.
2019 Elective Deferral Contribution Limits
For 2019, the elective deferral contribution limits are $19,000 for someone under the age of 50. For those individuals over the age of 50, the elective deferral contribution limits are $25,000.
A business is permitted to make a full profit sharing contribution or coordinate its contribution benefit with an Elective Deferral contribution by the participant. Regardless, the maximum contribution from either profit sharing or profit sharing/elective deferral contributions is capped at $62,000 for 2019. If your business is a spouse/spouse owned business with qualifying income, both spouses could contribute up to $62,000 (or $124,000 combined).
After-tax contributions are not elective deferrals, nor are they employer matching or profit sharing contributions. They are also not Roth contributions, but can be converted to Roth funds in the plan! They are After-Tax Contributions!
Confused? Don’t be. Read more on the benefits of After-Tax Contributions!
One of the great benefits of the Solo-K is that while you will be making new contributions based on self-employment earnings, you are able to to “rollover” or transfer other types of funds from other qualifying plans. Typically, most self-employed individuals may be rolling over an IRA or an old employer’s 401(k), 403(b), 457 or pension plan.
While the funds of an old employer’s Roth 401(k) plan can be rolled over into your Solo-K, it is not permissible to rollover a Roth IRA into your Solo-K