Solo 401Okay Fundamentals for Self-Employment Earnings (For 2020 & 2021)


That is the second of a multi-part collection on retirement accounts for self-employment revenue. I beforehand gave a rundown of SEP IRAs. On this publish, I’ll cowl the mighty Solo 401Okay. And up subsequent: the SIMPLE IRA.

Those that have or plan to have self-employment revenue ought to discover this related. If you happen to don’t fall in to these classes, you’ll be able to let curiosity be your information.

What’s a Solo 401Okay?

The Solo 401Okay has a ridiculous quantity of different names. It’s also generally known as an Particular person 401Okay, Solo-Okay, Self-Employed 401Okay, Uni-Okay, and the One-Participant 401Okay, amongst others. The IRS formally refers to Solo 401Ks as “One-Participant 401Ks”, however I’ve no means heard anybody use that terminology, so we’ll follow Solo 401Ks for this text.

Regardless of the complicated variety of nicknames, all of them seek advice from the identical factor: a 401Okay plan protecting a self-employed particular person (an revenue producing enterprise proprietor with no staff), or that particular person and his or her partner.

Solo 401K

There are a number of key variations between the employer 401Ks most of us are used to and Solo 401Ks, which we’ll cowl in a bit. Exterior of these variations, Solo 401Ks very carefully resemble Conventional 401Ks and Roth 401Ks we’re already acquainted with.

What are the {Qualifications} to Create & Contribute to a Solo 401Okay?

In contrast to the SEP IRA, the Solo 401Okay has no age or revenue restrictions. So as to have the ability to contribute to at least one, your contributions should come from self-employment revenue in that 12 months.

As with the SEP IRA, you do not want to be full-time self-employed in an effort to be eligible. You could possibly be part-time self-employed or earn a facet revenue from a secondary job or facet hustle. And having a Conventional 401Okay one other employer doesn’t exclude you from with the ability to begin and preserve a separate Solo 401Okay.

You additionally don’t must have a registered company (LLC, S-Corp, and so forth.) in an effort to be eligible.

The opposite qualifier is that you just can not make use of any full-time staff, exterior of the exception of a partner. Full-time staff are thought of to be those who work a mean of at the very least 30 hours per week for his/her employer.

Solo 401Okay Contributions: Employer & Worker

The defining distinction between normal employer 401Okay plans and Solo 401Ks is which you can make a contribution as an worker (much like normal 401Ks) and as an employer (much like SEP IRAs).

Because of this, you’ll be able to contribute far more of your self-employment revenue to a Solo 401Okay than you’ll be able to to a SEP IRA or SIMPLE IRA.

Solo 401Okay Contribution Limits

The wonderful thing about Solo 401Ks is the flexibility to contribute as each an employer and an worker and the way it can doubtlessly enhance your retirement financial savings to a different degree.

To recap, the most 401Okay contribution for workers is $19,500 in 2020 and 2021. People age 50 or older could make an extra $6,500 catch-up contribution in 2020 and 2021. Contributions can’t exceed 100% of compensation. This most is a mixed most between every other employer 401Okay and your Solo 401Okay. For instance, in case you are beneath age 50 and have contributed $10,000 to your day job employer sponsored 401Okay, you’ll be able to then solely contribute $9,500 ($19,500 – $10,000) to your Solo 401Okay as an worker.

Most worker + employer contributions (per eligible worker) are $57,000 in 2020 and $58,000 in 2021, or 100% of compensation, whichever is much less.

The utmost tax deductible contribution as an employer is 25% of post-contribution internet earnings (similar because the SEP IRA). For extra on this, try the IRS charge desk for self-employed contributions and my earlier publish on SEP IRAs.

Solo 401Okay Contribution Deadlines

There are primarily two completely different deadlines for Solo 401Okay contributions.

  1. Worker contributions: have the identical finish of calendar 12 months deadline as different 401Ks.
  2. Non-corporation employer contributions: are usually due the tax deadline for the earlier calendar 12 months (usually April 15). Extensions are doable.

If a contribution comes between January 1st and the tax deadline, you’ll be able to characterize it for the earlier or the current calendar 12 months. Contributions for a calendar 12 months have to be made previous to submitting your taxes for that 12 months.

Solo 401Okay Contribution Calculators

If you wish to double-check your math on how a lot you’ll be able to contribute to Solo 401Ks and evaluate to different retirement accounts, listed here are a number of Solo 401Okay contribution calculators to play with:

Are you able to Contribute to Each an Employer 401Okay and a Solo 401Okay?

When you’ve got employers, exterior of your self, you’ll be able to contribute to each your employer’s sponsored 401Okay and make a contribution to your individual Solo 401Okay as an employer and an worker.

Are there Roth Solo 401Ks?

Sure. Contributions to Solo 401Ks might be pre (Conventional) or publish (Roth) tax, in contrast to SEP IRAs, that are pre-tax solely.

Observe that as with employer Roth 401Ks, solely worker contributions might be after-tax Roth contributions. All employer contributions are pre-tax.

Are you able to Roll a Solo 401Okay Into an IRA?

Sure. You are able to do a 401Okay to IRA rollover with a Solo 401Okay to a Conventional IRA, SEP IRA, or perhaps a Roth IRA (with tax implications) – simply as you’ll be able to a Conventional 401okay.

You’ll be able to even roll a Conventional or Roth 401Okay, in to a Solo 401Okay, or right into a Roth Solo 401Okay (with tax implications).

As with all traditional-to-Roth retirement plan rollovers, any quantity you roll over is taken into account taxable revenue within the 12 months that you just roll it over. Be sure to perceive the entire tax implications for doing in order nicely.

The place Are you able to Open a Solo 401Okay?

A few of the low cost brokers highlighted in my “tips on how to begin a web-based dealer account” article have a Solo 401Okay choice, however they’re uncommon. Vanguard, Schwab, and Constancy provide them. At all times make sure you analysis minimal stability necessities and any related charges, together with account upkeep or inactivity charges earlier than creating your account.

Funding choices out there for Solo 401Ks can differ as nicely, per dealer. And a few might not provide a Roth choice. So do your homework.

Any Different Issues to be Conscious of?

One notable draw back to Solo 401Ks is that they’ll require extra paperwork and administrative duties than IRAs. You might be usually required to file an annual report on IRS Kind 5500-EZ in case your Solo 401Okay has $250,000 or extra in belongings on the finish of the 12 months.

Different Solo 401Okay Assets:

When you’ve got any questions, positively seek the advice of with a tax skilled and/or a brokerage agency.

Exterior of the Solo 401Okay sources highlighted earlier, you must also try the next articles:

Solo 401Okay Dialogue:

  • Have you ever opened a Solo 401Okay? In that case, why?
  • Who’s your dealer?
  • What Solo 401Okay ideas do you might have?

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