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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owners contributing to a Solo-K. Generally speaking, plan providers will allow up to 50% of the account balance to be withdrawn as a loan, under the promise to pay it back over a set period – one, two, or three years, respectively.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.