Today I want to talk to you about individual 401ks also known as solo 401k and what are the benefits of this type of plan? And what are the nuts and bolts of this type of plan? Let’s dig into this topic.
An individual 401k is the type of plan that has the ability to invest in anything the law allows, like real estate, private placements or any alternative investment to the stock market. It’s the most tax-advantageous, self-employed plan available with very high annual contribution limits. You can set up this plan even if you’re employed at a full-time job. And, you can borrow funds from the account.
An individual 401k plan is available to any individual who is a business owner or who will be establishing a business and does not have, or plan to have, full-time employees. The plan works great for consultants, home based businesses and independent contractors. Another advantage is the owner’s spouse may also contribute to the plan.
The IRS requires anyone that is going to have there own individual 401k have a written plan document that establishes the rules of the plan. This plan must be put into place, with rules and guidelines that state how the plan will operate. While the plan itself is lengthy, the Summary Plan Description explains, in plain terms, how the plan works.
Another great benefit from a control perspective is that a trustee must be designated to hold the assets of the retirement plan. In the case of an individual 401(k), you are able to act as your own Trustee and are charged with investing trust assets prudently and productively. You personally cannot benefit from the trust, you as the trustee cannot co-mingle personal funds with the trust and cannot enter into a transaction with the trust.
There are two types of contributions in an individual 401k plan: salary deferrals and a profit sharing contribution. Both contributions are generally tax deductible and they grow tax deferred until withdrawals which may begin penalty-free after age 59 1/2. Withdrawals after age 59 1/2 are taxed as ordinary income. Withdrawals must begin at the age of 70 1/2.
As with any retirement account in order to initially fund the Solo 401(k) you can rollover funds from Traditional IRAs, SEP Plans, previous employer 401(k) plans, Money Purchase plans, Profit Sharing plans, Keogh plans, Defined Benefit plans, 403(b) plans and Rollover IRAs. This is accomplished by setting up an account for the Solo 401(k) and directly transferring the funds from the Custodian to the trust bank account.
Another great benefit with an individual 401k is the amount you can contribute to the account. For tax year 2011 you can contribute the regular 401(k) maximum of $16,500 (with an additional $5,500 if over the age of 50 at year end). And, you can add up to 25% of compensation for the profit-sharing portion. The combined maximum of these contributions can’t exceed $49,000, plus catch-up additions, if applicable. Also, your plan can be designed with a “designated Roth component”, if you desire it.
You want your plan to have a loan provision permitting you to take out a loan. You are able to borrow up to 50% of the total 401(k) value up to a maximum of $50,000, tax-free. Repayment of the loan is according to a loan amortization schedule provided when the loan is initiated and must be paid back into the account (including interest). Failure to make the loan payments may cause a loan default causing taxes and IRS penalties.
We are pleased here at Blue Diamond Documents to announce that we are now offering plan documents for a solo 401k plan. We can help you get started with your solo 401k plan at a very competitive price. If you are a self-employed person with no employees we can help you start saving for your retirement future. Call us today at 623-628-2072 for more details. www.checkbookiraprep.com
Posted on 10/25/2011 at 12:00:00 AM