Retire Rich: Solo 401(k) for Small Business Owners

In the recent times, there has been a drastic increase in the number of American entrepreneurs who are not saving enough for their retirement. Retirement is the last thing on the minds of self employed workers these days as they fear to set aside the money, which might come handy in keeping their business rolling. This is the biggest mistake that small business owners make and, therefore, miss out on the opportunity to build up their retirement savings.

Individual 401(k) / Solo 401(k) Plan

Solo 401(k) plan is one of the best retirement plans for the self employed and small business owners whose income is more than $100,000 or more. This plan offers tax-deferred growth potential and is very easy and cost-effective plan for small business owners. The feature that makes this plan an attractive retirement savings instrument is that the allowable contribution to an individual 401(k) plan will be much larger than what you can make under any other retirement plan. Since Solo 401(k) plan is a regular plan in combination with a profit-sharing plan, the owner can defer the maximum compensation under this plan, and can still contribute up to 25 percent of the total amount to the profit sharing plan.

The eligibility criteria for a solo 401(k) plan mainly comprise of the following two requirements:

  • No full time employees: Under this plan, only business owners who do not have any full-time employees, or if their full-time employee is their spouse, can invest under this plan.
  • Self-employment activity: To be able to benefit from this plan, one must have either of the following self-employment activities:
    • Limited Liability Company
    • S Corporation
    • C Corporation
    • Ownership of sole proprietorship
    • Limited Partnership

Solo 401(k) plan also comes in another version as Roth Solo 401(k) to benefit those who are looking for a tax-free retirement solution for their proprietorship. As the state income tax rates are expected to rise in the future, it is one of the most effective ways of making your retirement investment tax-free, including currencies, precious metals, real estate, etc.

Benefits of a Solo 401(k) Plan

The features that make solo 401(k) or individual 401(k) plan so popular among self-employed business owners are:

  • Flexibility to borrow loan: Unlike other retirement plans like IRA, which do not offer any loan to the participant, this plan allows the participants to borrow up to 50 percent of their account value in case of an emergency. This loan can be paid off within five years at the minimum prime interest rate.
  • Easy check book control: Solo 401(k) plan has simplified investment (as simple as writing a check) so that a participant can act quickly when a good opportunity comes up.
  • Easy administration: This plan is very easy and cost effective to operate as there is no annual filing requirement till the assets are under $250,000 in value. In case, the assets increase beyond $250,000, you would be required to file a short information return along with the IRS.
  • High contribution limits: Solo 401(k) or individual 401(k) plan has a striking feature that allows the participant to make up to $49,000 of annual contributions with an additional catch up of $5,500 for those over the age of 50.
  • UDFI exemption: Unlike IRA, which is leveraged with mortgage financing in case of real estate purchase, solo 401(k) plan is usually exempted from Unrelated Debt Finance Income (UDFI).

Therefore, it is believed that solo 401(k) plan is a great retirement investment vehicle for small business owners worth considering, owing to its numerous benefits while planning your retirement.

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