Solo 401k Are You a Small Business Owner Planning for Retirement? Check out this new option.
Like many business owners, Bill works hard. He spends most of the time at work and makes a good living. He is not
only concerned with everyday business issues, but also how to effectively save for retirement. He has aspirations of
relaxing, traveling, and visiting with family while spending his golden years in comfort. In the past, he has had a
short list of retirement accounts from which to choose. He has had SEP, Simple, and Keogh plans over the years.
Now Bill is excited because he discovered the Solo 401k that allows him to contribute more money, borrow funds,
and consolidate all of his previous accounts. Bill can also skip making contributions if business isn’t going well.
Bill learned that the Solo 401k is a tax-deductible and tax-deferred retirement plan that became available after tax
law changes became effective January 1, 2002. This is a BIG Retirement Plan for small businesses that can include
sole proprietorships, corporations, partnerships, and non-profits organizations. This plan is for owner/s (and
spouse/s) only businesses or those with only part-time workers. Owners/partners along with their spouses can
contribute if they are an owner or work for the business. Bill likes this account because it does not have the
administrative headaches that accompany the typical 401k. A form 5500ez only has to be filed after your account
value reaches $100,000. Fees vary, but are typically much, much less than a traditional 401k plan. There can be set
up charges, administrative fees, and costs if you take out a loan. The government also unveiled a new tax credit that
can be taken for costs associated with starting retirement plans such as a solo 401k. This credit can offset the lesser
of $500 or ½ of the startup costs for retirement plans (Solo 401k costs should be well under this amount).
Bill is under age 50, so this account allows him to save up to the first $15,500 of earnings along with 25% of every
dollar earned thereafter up to a total contribution of $45,000! After age 50, an additional contribution up to $5,000 is
allowed. Only earned income counts towards contribution limits so business owners need to consider this when
determining how to pay themselves through a combination of salary, dividends, bonus, etc.
Bill is sold on the Solo 401k features:
-Contributions up to $45,000 for 2007 & a catch-up provision (age 50+) allowing an additional $5,000 per year.
-Allows for consolidation of previous accounts such as 401k, Traditional IRA, Money Purchase Plans, Profit
Sharing, 457, 403b SEP, Keogh, etc.
-Allows for funding flexibility. You decide each year if or how much to contribute.
-Easy to set up and maintain. Low cost and few administrative requirements.
-Allows for borrowing (up to $50,000) where many other accounts do not.
- The Solo 401k allows you to put in large amounts of money whether you earn $13,000 or more than $300,000.
This type of account is great for many individual business owners like Bill, freelancers, consultants, independent
contractors, or those work outside of their primary employer. There could be some drawbacks because this account
is only a couple of years old, so not all mutual fund companies or financial advisors offer these types of accounts.
Also, if you hire full time employees you need to change retirement plans or convert to a regular 401k plan. If a
business owner does not plan on saving more than $4,000 a year ($5000 if over age 50) or desire the loan option,
then an IRA might be more cost effective. Hampton Scurlock III is a CERTIFIED FINANCIAL PLANNER®
and President of Retirement Tax Advisory Group. He can be reached at 859-233-1083 and is available to
speak to your group free of charge.
Disclaimer-The information provided here does not constitute legal, tax, or investment advice. Consult a financial professional
before making any investment decisions.