Planning for Retirement: The Solo 401K
Planning for Retirement: The Solo 401K
by Guest Author Craig Lewis Gillooly, Esq., J.D.
A “Solo 401k” offers great tax deferral and retirement planning opportunities for the self-employed. Starting in 2002, self-employed people may establish a 401k plan easier and with greater tax deductions than ever before. If you are self-employed, and do not have a 401k, you may wish to consider if it is appropriate for you.
In 2006, with catch up provisions, you can deduct up to $49,000 for each participant, and up to $98,000 together with a spouse.
You can contribute more to a Solo 401k on less income than you can to an IRA, a SIMPLE IRA or a SEP-IRA.
If you had a good year, you can put in more, up to the limits. You can always put in less or nothing at all.
A side business is a prime candidate for a solo 401k. You can still have a 401k at work and open another one for your sideline business.
Once your 401k plan is established, you may roll over other retirement accounts into it.
You may borrow up to 50% of your account balance (up to a $50,000 loan) and repay it over five years (or longer, if the loan is used to acquire a principal residence). Interest is paid back into your own 401k plan at around prime plus 1%. The interest paid is expressly nondeductible, regardless of the purpose of the loan. (You cannot borrow from a SEP-IRA or IRA, but you can roll a SEP-IRA or IRA into your Solo 401k and then borrow from it.)
The plan may include a self-directed brokerage account, allowing maximum investment flexibility.
If assets exceed $100,000, a simplified tax return may be filed.
In the company 401k context, Employer Matching Contributions and Employer Profit Sharing Contributions are not subject to FICA withholding, either at the time the contributions are made or at the time a distribution is made to a participant. See Internal Revenue Code Section 3121 (a)(5)(A).
This is also true for Employer contributions in Solo 401k's where the sponsoring entity is a corporation and the wages are paid under a W-2 and for Employer contributions in Solo 401k's where the sponsoring entity is a sole proprietor and the employer contribution is made on behalf of another (in a Solo 401k, that is typically just the spouse-in this instance the employer contribution is a line item expense entered on the Schedule C and therefore is not subject to FICA (SE Tax).
Where the sponsoring entity is a sole proprietor and the employer contribution is not made on behalf of another (such as the Spouse), the employer contribution does not appear as an expense on the Schedule C and therefore is in fact subject to FICA (SE Tax).
The employer contribution is calculated based on net earned income for Sole Proprietors and on W-2 wages for Corporations. The net earned income and the W-2 wages themselves are always subject to FICA, as is the employer contribution where the employer contribution is made on behalf of oneself.
Employer contributions may be made after year-end (by your tax return deadline, including extensions).
Craig Gillooly is an Attorney specializing in administering Solo 401k's for the self-employed. He is the CEO of 401kBrokers.com and can be reached by email at craig@401kBrokers.com. He is also a volunteer Small Claims Judge Pro Tem since 1998 in San Diego Superior Court and the Past President of the La Jolla, CA Bar Association.
You may ask Craig questions at craig@401kBrokers.com.
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