Are you self employed and want to save on federal taxes by making substantial tax deductible contributions to a qualified retirement plan so you can retire earlier? If so, a new and exciting choice is available due to the Economic Growth and Tax Reconciliation Act of 2001 which permits self employed individuals (without full time employees other than a spouse) the option to establish a Solo 401k.
A Solo 401k permits qualified self employed individuals to dramatically reduce taxes and build a retirement fund faster than other self employed retirement plan options, including the IRA, SEP IRA, Keogh, Profit Sharing or SIMPLE IRA. The Solo 401k also offers the unique feature of a tax free Solo 401k loan. The Solo 401k is simply one of the best tax breaks and retirement planning tools available to the self employed.
What's special about the Solo 401k?
There are several unique advantages offered by the Solo 401k. They
- Significant tax deductible contributions (up to $52,000 in 2014 or $57,500 if age 50 or older). Depending on income, the Solo 401k may allow twice as much (or more) tax deductible contributions, when compared to other self employed retirement plans.
- Solo 401k loans are permitted. 50% of the assets of the Solo 401k ($50,000 maximum) may be borrowed using a Solo 401k loan. Money is available when needed tax free and penalty free, so the Solo 401k enables immediate tax savings and builds a source of funds that can be tapped in an emergency.
- The most generous "catch up" contributions for those 50 or older. An extra $5,500 for a Solo 401k vs $0, $1,000, or $2,500 for a SEP IRA, IRA, or SIMPLE IRA respectively.
- Flexible funding requirements. Once established, no contribution is required in any year if financially inconvenient. There is a maximum annual Solo 401k contribution, but no minimum required contribution. The contribution flexibility of a Solo 401k eliminates potential funding worries if there is a bad business year.
- Simplicity - both to set up and maintain. Administration is minimal because complex discrimination tests are not required as with corporate 401k plans. IRS Form 5500 does not need to be completed unless plan assets exceed $250,000.
Furthermore, rollovers into a Solo 401k are permitted from a SEP IRA, Profit Sharing, Money Purchase, Rollover IRA, Traditional IRA and SIMPLE IRAs after two years of SIMPLE participation or from a previous employer's 401k, 403b, or 457b. As a result existing retirement funds can be consolidated by rolling them over into a Solo 401k to take advantage of the exciting Solo 401k advantages.
The Solo 401k has some unique advantages. No other self employed retirement plan offers such large tax deductible contributions with such flexibility from year to year with ease of set up and maintenance, and with the most generous catch up provisions for those age 50 or over. Moreover, there is access to the retirement funds before retirement in a pinch, tax free and penalty free thanks to the unique availability of a solo 401k loan.
Solo 401k Loan Rules
Learn more about the loan rules for a Solo 401k.