Going Solo with a 401(k)

Thanks to favorable tax law changes, Solo 401(k) plans are getting a great deal of attention.

It used to be that 401(k) plans were not generally the retirement plan of choice for sole proprietors and firms that employ only the owner or the owner and his/her spouse. Other plans – such as the SEP or SIMPLE IRA – were less complicated and less expensive to administer. Profit sharing plans allowing discretionary company contributions have long been another popular option for small businesses.

Unfortunately, none of these choices allow the owner to contribute significant amounts of pretax earnings to a retirement plan. A Solo 401(k) could be the right option for you.

Contribute Two Ways
  • First, with a Solo 401(k), you can contribute a pretax salary deferral of up to 100% of the first $18,000 of your 2016 earnings ($24,000 if you are age 50 or older).
  • Second, deductible profit sharing contributions may also be made up to a maximum of 25% of compensation (20% for sole proprietors). In 2016, the combination of all contributions, including salary deferrals, profit sharing, and any others, cannot exceed the lesser of 100% of the owner’s compensation or $53,000.
Other Considerations

An important consideration involves future employees. Contributions for the owner may be reduced and expenses will be higher if employees are hired. So, if future plans include hiring employees, a Solo 401(k) may not be a good choice.

However, there is an exception—an owner’s spouse who works in the business can generally participate in a Solo 401(k) without adverse effects. 

You should also note that annual contributions to the Solo 401(k) are not required. And, the owner can borrow from his/her Solo 401(k), just like participants in a traditional 401(k) plan.

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May lose value

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