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What is a Solo 401k?
An individual or one-participant 401k – commonly referred to as a Solo-K in the world of business owners – can be an important aspect of retirement planning for a sole proprietor as well as powerful financial planning tool. A Solo-K provides similar benefits as a traditional employer-sponsored 401k retirement contribution plan for employees of a company, but is set aside specifically for business owners with only one worker – him or herself.

The IRS created the option for establishing and subsequently contributing to a Solo-K in response to small business owners needing an additional, more flexible option for socking away funds for the purpose of retirement in a tax-deferred way, above and beyond the contribution limits for traditional or ROTH IRA options available to individual earners. The Solo-K’s benefits in relationship to saving for retirement include the following:

1)  Individual business owners are allowed to defer up to the annual maximum of earned income as a contribution to the Solo-K, defined by the IRS – for 2014, this contribution limit is capped at either 100% of earned income or $17,500 (whichever is less) for those individuals under 50, and either 100% of earned income or $23,000 (whichever is less) for those individuals over 50.
• This is similarly designed in terms of traditional 401k plans offered through employers, as limits as well as the ability for catch-up contributions for participants over the age of 50 are allowed.

2)     In addition to participant contributions as listed above, business owners are allowed to supplement the account with employer contributions up to the allowable limit, as defined by the IRS – for 2014, 25% of compensation, or earned income, is allowed to be contributed to the plan from the employer.
• This is similar to a traditional 401k contribution plan and can be viewed as the matching contribution from an employer in that situation.
It should be noted that total contributions to a Solo-K cannot exceed $52,000 for 2014, from all allowable sources.

Solo 401k: What does this mean for the business owner? 

As a sole proprietor in any type of business, it can be difficult to navigate through the myriad of options that are available for retirement savings, and understanding the implications of not saving enough for retirement over time can be overwhelming.

Please contact Thomas E. Space at your convenience for an initial consultation. He’ll work with you one on one to determine a roadmap to success. 

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You may not be an expert in investing or financial planning, but you do know what your financial needs are and Advisor Financial Planning Group can get you there. I pledge to you, with the trust you place in Advisor Financial Planning Group, that Trust will be reciprocated with “client biased” results, high ethical standards and intentional avoidance of any conflict of interest.

A Solo-K can stand alone or in conjunction with supplemental retirement savings accounts as a powerful retirement and tax planning tool for those who do not plan to hire additional employees. The contributions that are made from the business can reduce the tax burden for the year in which they are contributed, while the contributions made from the individual owner can reduce taxable income personally. The need to put away savings in a tax-deferred way, as described above, is an important aspect of any business’ financial planning; however, the most powerful benefit of a Solo-K that can be a lifesaver to small business owners is the loan option.​

As with the majority of traditional employer-sponsored 401k contribution plans, employees who meet a certain set of criteria are allowed to withdraw funds from their account as a loan from the provider, with a promise to return payment through paycheck deferrals. The same option exists for small business owners contributing to a Solo-K. Generally speaking, plan providers will allow up to 50% of the account balance to be withdrawn as a loan, under the promise to pay it back over a set period – one, two, or three years, respectively. As opposed to an individual consumer loan, funds borrowed from a 401k or Solo-K account are paid back directly to the account, not a bank. Interest rates connected to these types of loans are fairly low on average, and that interest is paid back to the account, not the provider. This option can provide timely, cost efficient cash-flow to business owners should the individual – and ultimately the business – need funding outside of traditional lending options.

Finally, the Solo-K is not difficult or time consuming to establish, and as long as only one participant works for the business, there is no cumbersome reporting requirement or plan testing necessary. Also, a Solo-K can carry a ROTH option as well, allowing for savings now and powerful tax-free dollars during retirement years. A wide variety of investment options can be placed within the account as well, providing all the benefits of similar retirement savings accounts through traditional employer-sponsored plans.

Overall, if a business owner is seeking an option for retirement savings that is both flexible and easily managed, the Solo-K may be a viable choice.