What is a Solo 401(k)?

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The one-participant 401(k), also known as a Solo 401(k), Solo-K or Uni-K, is a great option for self-employed individuals to consider when planning for retirement. To establish a Solo 401(k), the business must have no full-time employees other than the business owner and his or her spouse. Read below to learn more about Solo 401(k)s to determine if this is the right option for you.

Solo 401(k) Contribution Limits

One of the biggest advantages of all 401(k) plans is that the maximum contribution limit exceeds those of other tax-deferred retirement savings plans such as individual retirement accounts (IRAs). However, no 401(k) plan allows for unlimited tax-advantaged contributions. Solo 401(k) plans are subject to the same contribution limit guidelines as any other 401(k) plan. The maximum employee 401(k) contribution for 2019 is $19,000. Employees aged 50 or older may also qualify for an additional catch-up contribution of $6,000. In the event that employers contribute to the employee 401(k) savings plan, the combined total of employee and employer contributions cannot exceed $56,000 for employees under 50 years of age, or $62,0000 for employees aged 50 or older eligible for catch-up contributions.

Contributing to Solo 401(k) as Both Employee and Employer

When you establish a Solo 401(k) plan, you can make contributions to your retirement savings as both the employee and the employer. Your contributions as an employee (elective deferrals) cannot exceed $19,000 for 2019. In general, the total of your employee contributions and your contributions as the employer (employer non-elective contributions) cannot exceed the same maximums noted above for all 401(k) plans. However, the Internal Revenue Service (IRS) provides guidelines for calculating the maximum amount of elective deferrals and non-elective contributions you can make for yourself. Seeking the advice of a financial professional is highly recommended to assist you with calculating your one-participant 401(k) contributions.

Employer 401(k) and Solo 401(k)

Contributing to multiple retirement savings plans is allowed by the IRS. However, the annual contribution maximum is per individual and not per plan. That means having two 401(k) plans does not double your annual contribution maximum. Your maximum contribution for 2019 remains $56,000 or $62,000, if you are eligible for catch-up contributions. If you have the option to invest in both an employer 401(k) and a Solo 401(K), you will need to compare your employer plan to your self-employed one-participant 401(k) plan to determine if splitting contributions between the two accounts makes sense for you. This can be a complex comparison and we suggest you work with a financial professional to help you determine the best option for your individual situation.

Our team at Wickham Financial & Insurance Services works closely with self-employed business owners to plan for retirement. When you meet with our financial advisors, we will help you evaluate all of your retirement savings options to determine which solution works best for you. In the event that a Solo 401(k) is right for you, we can help you establish your plan and assist you with identifying the best investments to meet your financial goals. We look forward to partnering with you on your financial journey.

Any information provided has been prepared from sources believed to be reliable but is not guaranteed, does not represent all available data necessary for making investment decisions and is for informational purposes only.