The Solo 401k Plans are designed to build the retirement assets of a small business owner or self-employed individual such as independent contractor or consultant. This IRS-approved plan will work if you are independent contractor or your business has no full time employees other than you or your spouse.
The Economic Growth and Tax Relief Reconciliation Act (EGTRRA), passed in 2001, stipulates how the self-employed or sole business owner can use a 401k. In particular, the act clarifies that a single qualifying participant can make contributions in the role of employee and employer.
This can lead to very high contribution limits– if you meet two Solo 401k eligibility requirements:
The presence of self-employment activity
The absence of full-time employees
Be Your Own Trustee
Every 401k designates a trustee to hold the assets of your retirement plan. But in the case of the Solo 401k, you may act as your own trustee, which gives your “checkbook control” over the assets and lets you invest as you see fit.
In the case of the Solo 401k, you are able to act as your own Trustee and are responsible for investing trust assets productively and prudently. This means, as Trustee of the Plan, you will have Total Control (checkbook control) over the Plan assets allowing you to make investments by simply writing a check from your 401k Trust account. This makes a Solo 401k ideal for real estate and other non-traditional investments. However, as a trustee you are prohibited from benefiting directly from the trust. You may not combine personal money with the trust or do any transaction with the trust.
Flexible
Investment
Options
If you are self-employed, a Solo 401k plan allows you to choose the investment option best for you– with no custodian consent required (although the IRS does pinpoint a handful of prohibited investments, which you can find on their website).
Much like Checkbook IRA, the Solo 401k plan lets you broaden your investment options, but without the need to establish an LLC or pay fees to a custodian. In addition, a Solo 401(k) plan offers a high annual contribution limit (up to $56,500), allows you to borrow up to $50,000 for any purpose, and imposes no custodian fees.
Real
Estate
Investments
Do you like tax-deferred real estate investment? That’s part of the Solo 401(k) plan, too! The income you get from your investments will flow back into your retirement plan, and you won’t pay a penny of tax on it until you take a distribution.
If you are using an IRA with nonrecourse debt to finance a real estate purchase (personal debt associated with an IRA investment is a prohibited transaction), your income investment would trigger an Unrelated Debt Financed Income (UDFI) tax. UDFI is a penalty that could subject you to a 35 percent tax! But a 401k Plan using nonrecourse financing for a real estate investment is exempt from the UDFI tax according to IRS Section 514(c)(9).
Other
Advantages
You may contribute up to $59,000 in your Solo 401(k), which can boost your retirement earning considerably and offer great tax advantages.
You may borrow up to $50,000 from the plan any purpose– including financing your business or paying personal bills– tax free and penalty free. Take loan any time prior to qualified retirement age.
Determining
Your
Eligibility
A Solo 401k plan is available to any individual who is already a business owner or who will be establishing a business and does not have, or plan to have, full-time employees. Eligible participants may include independent contractors, home-based businesses and real estate professionals.
If that describes you, a Solo 401(k) plan is perfect investment option. And as a participant, you may also have your spouse contribute to your plan if he or she is an employee of your business.
Borrowing
From
Your
Plan
One of the benefits of the Solo 401k plan is that it allows plan participant to take out a loan from retirement account. Under Internal Revenue Code Section 72(p), you may borrow up to 50 percent of the total Solo 401k value or $50,000 (whichever is less tax-free) for any reason. Your repayment schedule is based on when the loan was initiated and can span up to five years.
The loan must be paid back at least quarterly at a minimum interest rate of the current Prime.
The entire loan must be paid in full, including interest.
A loan default can incur IRS penalties.
Funding Your Solo 401k
Initially funding your Solo 401k is much like funding your Checkbook IRA, in that you may roll over funds from a variety of sources. From IRAs, SEPs and previous 401k plans to profit-sharing, Keogh plans and Defined Benefit plans, the Solo 401k offers tax-free rollovers that let you continue amassing wealth seamlessly!
You will begin by opening a Solo 401k Trust account at any bank or credit union; then you will transfer the funds from the current custodial plans to your new account.
Maximum
Contributions
If you’re under 50 years old during calendar year 2013, you may contribute the regular 401(k) maximum of $18,000 as salary deferral. If you’re age 50 or older by year’s end, you may increase your annual maximum contribution another $6,000, which adds up to a total maximum contribution of $24,000. Additional 25 percent (20 percent if you run a sole proprietorship or single-member LLC) of compensation can be contributed on the employer side as for profit-sharing component. The combined maximum of these contributions can’t exceed $59,000, which includes applicable catch-up additions. At any age, if you prefer Roth-type contributions you can design your Solo 401k Plan with a Roth component.
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