Solo 401k


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The Solo 401k

The Solo 401(k) Plan (also known as Individual 401(k) or Self-Employed 401(k)) is the ultimate retirement solution for the self-employed. It is a traditional 401(k) that covers only one employee. To be eligible for the Solo 401(k), you must be self-employed and have a small business with no full-time employees (employees that work more than 1,000 hours per year) other than a spouse. One of the main reasons the Solo 401(k) is such a popular solution for the self-employed is because it includes all of the great benefits of a conventional 401(k), but without the high administration costs. The ability to generate tax-deferred and tax-free returns from your retirement investments when you retire is perhaps the last surviving legal tax shelter. With a Solo 401(k) you can make almost any investment tax-free, including real estate, tax liens, precious metals, private business investments, and cryptocurrencies.

Solo 401(k) Plan Advantages

There are several advantages of using the self-directed Solo 401(k) if you are eligible to establish one. One of the main advantages is you are able to achieve the maximum contribution faster.

  • The total annual contribution for a self-directed Solo 401(k) is $56,000 (if you are under 50) and $62,000 (if you are over 50) in 2019 with two types of contributions:
  • Employee salary deferral contribution: Employees can contribute up to $19,000
  • Employer profit-sharing contribution: The annual limit is 25% of the employee's pay, or 20% if you are self-employed
  • Catch-up contributions allow individuals 50 and older to contribute up to $62,000 to a self-directed Solo 401(k)

You can also make a penalty-free loan of up to $50,000 from the 401(k) that can be used for any purpose. Also, the self-directed Solo 401(k) is easy much easier to administer and much more cost-effective than other retirement plans like IRAs. Other advantages of the Solo 401(k) over IRAs include:

  • No need to establish an LLC: LLCs can be costly, especially depending on which state you live in. With a Solo 401(k), the trustee (you) can make investments without the need of an LLC.
  • Strong Creditor Protection: Most states offer better creditor protection for this retirement plan than a Traditional IRA. Additionally, Individual 401(k) Plan assets are protected against creditor attack in a bankruptcy proceeding.
  • Roth After-Tax Benefit: You have two formats with a Solo 401(k): pre-tax, or Roth (after-tax). With a Traditional IRA, you only have the option of pre-tax. With the Roth option, your money can grow in its retirement account tax-free. And of course, when you withdraw at retirement, you pay no additional taxes.
  • Nonrecourse Leverage Exception: You can borrow to invest in real estate and other investments without penalty. By using nonrecourse funds, you won’t trigger the Unrelated Debt Financed Income Rules and the Unrelated Business Taxable Income (UBTI and UBIT). This exception isn’t available to IRAs.

To learn more about the Solo 401(k) Plan, please contact a 401(k) expert at (615) 686-2407.

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