A Solo 401(k) plan, also called a self-employed 401(k), an individual 401(k), or a Uni-K, works the same as the traditional 401(k) plans offered by larger companies. A Solo 401(k) allows sole proprietors or solely owned corporations with no other employees to save for retirement both as an employer and an employee, often enabling owners to contribute more than would otherwise be possible under an individual retirement plan. Spouses may also contribute under a Solo 401(k) if he or she earns income from the business.
This plan is funded with two sources of contributions. The first source is a salary deferral contribution that can be as much as $16,500. The second source is a discretionary profit sharing contribution that can be as much as 25% of compensation or 20% of self-employment income. These combined sources are limited to 100% of compensation up to $49,000. If the owner is at least age 50, he or she can contribute an additional $5,500 catch-up contribution outside these limits.
These contributions are discretionary, so one can save the maximum in profitable years and save less or even nothing in leaner years. Unlike with SEP IRAs, a Solo 401(k) allows loans against retirement savings.
The Solo 401(k) comes in both a traditional and Roth version. With the traditional Solo 401(k), the salary deferral is contributed on a pretax basis and it grows tax-deferred. The money is taxed when withdrawn. With the Roth version, salary deferral is contributed with after-tax dollars and grows tax-free – which means it is not taxed upon withdrawal. Contributions can be split between the two types of accounts.
A Solo 401(k) requires a legal plan document which states the terms of the plan. Because there are no other employees, there are no annual administration costs. There may be an annual IRS filing if the plan assets exceed $250,000.
A Solo 401(k) is ideal for owners who wish to maximize their retirement savings with flexibility, loan availability, and low cost administration compared to standard retirement plans. This plan is great opportunity for business owners who prefer to take advantage of every tax break available.