Solo 401(k) : The Self Employed Investment Vehicle
Posted by: Administrator in UBIT, TPA, solok with roth, solok, SEP IRAs, Salary Deferral, profit sharing, myblog, Faisal Sublaban, Brooklyn Troy on
Oct 06, 2009
There is a common misconception that the only real retirement option for self employed individuals is a SEP-IRA. A lot of advisers aren't too familiar with the Solo 401(k) and especially the solo(k) with a Roth option.
Who Can Benefit?
Real estate professionals, sole practitioners, entrepreneurs, independent contractors, interior decorators, essentially any self employed person.
What is the difference?
Here is a general breakdown of the two:
SEP IRA's allow for tax-deductible contributions as well as deferred growth. The contribution limits for the SEP IRA is 25% of your compensation with a cap of $44k. The only issue with this is that the IRS only allows you to contribute 25% of you net profit. This is where one of the major advantages come into play for a solo(k).
A Solo(k) has the same contribution limits however you can not only contribute 25% of profit sharing you can also contribute tax-deductible salary deferrals of up to $15k per year. Basically you can make very little self employed income and defer it all. This gives you an added advantage if your self employed income is your secondary income and you are looking to maximize your tax advantages. Best of all there is no UBIT on leveraged real estate or investments, and you have the ability to borrow against the plan. You can also add your spouse to the plan and your total annual contributions can total $109k for joint filers over the age of 50!!
Another key advantage is that you can separate your Solo(k) into four Sub-Accounts or ''buckets":
1) Two Salary Deferral Buckets: Allocate up to $16.5k or $22k (if over age 50) to either:
- Roth Sub-Account (No restriction on AGI)
- Traditional Tax Deferred Sub-Acount
2) Profit Sharing Bucket: Lessor of:
- A) $49k (minus $16.5k from salary-deferral)
- B) 25% of your ''compensation'' or ''earned income''
3) Rollover Bucket: All Rollovers go here, both funds are not permitted
4) A TPA is required. Pre-established relationship with Pension Benefits Consultants (PBC)
In summary you can win big being self-employed and having a Solo(k).
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