THE BOTTOM LINE

A Solo 401(k) is tailor-made for sole proprietors and independent contractors such as consultants and real estate agents. It’s a powerful retirement plan with very high contribution limits and the retirement account owner is allowed to be the Trustee. As with a Checkbook IRA, the IRA Trustee has complete control over the funds.

Why Would I Want A Solo 401(k) ?

This type of plan possesses most of the characteristics of the Checkbook IRA including having the ability to invest in anything the law allows, but without the need to establish an IRA LLC.  It’s the most tax-advantageous, self employed plan available with very high annual contribution limits. You can set up this plan even if you’re employed at a full-time job. And, you can borrow funds from the account.

Solo 401(k) Eligibility

The Solo 401(k) plan is available to any individual who is already a business owner or who will be establishing a sole proprietorship and does not have, or plan to have, full-time employees. The plan is well suited for consultants, home businesses and independent contractors. The owner’s spouse may also contribute to the plan.

Solo 401(k) Plan Document

All IRS qualified retirement plans under ERISA are required to have a written 401k plan document that establishes the provisions of the plan. This plan must be put into place, with rules and guidelines that state how the plan will operate. While the plan itself is lengthy, the Summary Plan Description explains, in plain terms, how the plan works.

The Trustee

A Trustee must be designated to hold the assets of the retirement plan. In the case of the Solo 401(k), you are able to act as your own Trustee and are charged with investing trust assets prudently and productively. Legally barred from benefiting directly from the trust, the Trustee cannot co-mingle personal funds with the trust and cannot enter into a transaction with the trust.

Solo 401(k) Tax Advantages

The Solo 401k plan accepts two types of contributions: salary deferrals and a profit sharing contribution. Both contributions are generally tax deductible and they grow tax deferred until withdrawals which may begin penalty-free after age 59 1/2. Withdrawals after age 59 1/2 are taxed as ordinary income. Withdrawals must begin at the age of 70 1/2.

Rollovers

As with the Checkbook IRA, in order to initially fund the Solo 401(k) you can rollover funds from Traditional IRAs, SEP Plans, previous employer 401(k) plans, Money Purchase plans, Profit Sharing plans, Keogh plans, Defined Benefit plans, 403(b) plans and Rollover IRAs. This is accomplished by setting up a Trust account for the Solo 401(k) and directly transferring the funds from the Custodian to the trust bank account.

Contributions

For the salary deferral portion in 2009, you can contribute the regular 401(k) maximum of $16,500 (with an an additional $5,500 if over the age of 50 at year end). And, you can add up to 25% of compensation for the profit-sharing portion. The combined maximum of these contributions can’t exceed $49,000, plus catch-up additions, if applicable. Also, your plan can be designed with a “designated Roth component”, if you desire it.

Taking Out A Loan

The plan document has a loan provision permitting you to take out a loan. You are able to borrow up to 50% of the total 401(k) value up to a maximum of $50,000, tax free. Repayment of the loan is according to a loan amortization schedule provided when the loan is initiated and must be paid back into the account (including interest). Failure to make the loan payments may cause a loan default causing taxes and IRS penalties.

For Real Estate Investors

Income to an IRA associated with the financed portion of a property purchased using a non-recourse loan is subject to the Unrelated Debt Financed Income (UDFI) tax. UDFI is a type of unrelated business taxable income. Solo 401(k) plans are exempt from this tax.

Prompt Service & Cost Effective

You can expect the process to set up a Solo 401(k) to take about 30 days.  If your current custodian is immediately responsive in releasing your funds, it will take even less time.  Everything can be handled by phone, email, fax, express or regular mail.

 Additionally, you’ll find that our fee for this service is up to 40% less than other companies that perform the same or similar services.

Your Next Step

For immediate analysis of your situation and the best strategy for your investment interests, call us at 877-229-9763. During business hours, we’re generally able to answer your call immediately.  If leaving a message during business hours, you can expect a return call within an hour.  Otherwise, you’ll hear from us the morning of the next business day.

Plan Structure

Click on the image at left to view a diagram of the Solo 401(k) plan structure. For more information about all of our self directed IRA plans and how our turnkey setup process works, please view the How our Process Works page.