• If you or your spouse own a business and have no full-time employees, you may be eligible for a solo 401k. The business that adopts this type of plan can be an S-Corp, LLC, Sole Proprietorship, Partnership or C-Corp. Whatever entity it is, it must receive ordinary income.
  

• The Solo 401k allows business owners to contribute as both the employer and employee, resulting in higher contribution limits compared to other retirement plans. There are two types of contributions: employee (elective) contributions and employer (profit-sharing) contributions.
• Employee contributions: The business owner can contribute a portion of their earned income (salary or self-employment income) as an employee, up to the annual limit set by the IRS. 
• Employer contributions: As an employer, the business owner can make additional profit-sharing contributions up to 25% of their compensation or earned income. 

• The owner of a solo 401(k) wears two hats: employer and employee. Contributions can be made to the plan in both capacities. The owner can contribute both:
• Elective deferrals up to 100% of earned income up to the annual contribution limit of $22, 500 in 2023.
• Employer nonelective contributions of up to 25% as defined by the plan.
• Total contributions for individuals under the age of 50 cannot exceed $66,000 for the year 2023.

• Self-employment income is earned from carrying on a “trade or business” as a sole proprietor, an independent contractor, or some form of partnership. To be considered a trade or business, an activity does not necessarily have to be profitable, and you do not have to work at it full time, but profit must be the end goal. Some examples of self-employment income are: contract work, freelancing, driving for Uber and Lyft, working a full-time job and a part-time side gig, receiving a Form 1099-MISC, or even hosting a property on Airbnb.

• In general, it is possible to transfer funds from another 401k plan to your Solo 401k, provided that your Solo 401k plan document permits rollovers and the funds originate from a qualified retirement plan. This rollover option allows you to consolidate your retirement savings and simplify the administration of your retirement accounts.

1. Tax-deductible contributions: Contributions to a Traditional Solo 401k can be deducted from your taxable income, reducing your current tax liability.
2. Tax-deferred growth: Earnings and gains in a Traditional Solo 401k grow tax-deferred, allowing for potential compounding without immediate tax obligations.
3. Tax-free withdrawals with Solo Roth 401k: Contributions to a Solo Roth 401k do not provide an upfront tax deduction, but investment earnings grow tax-free and qualified withdrawals in retirement are tax-free.
4. Catch-up contributions: Individuals aged 50 or older can make additional catch-up contributions to their Solo 401k, reducing taxable income and boosting retirement savings.
5. Potential tax credits: Small business owners may qualify for a tax credit for establishing and managing a Solo 401k, with the credit covering up to 50% of setup and administration costs, up to a maximum of $500 per year for three years.

• • Buying real estate with an IRA or a Solo 401k certainly can be done! You just need to find a custodian that will hold non-traditional or ‘alternative’ investments. Other investment options for self-directed Solo 401k plans include private equity, tax liens, private loans or mortgages, limited partnerships (such as oil and gas ventures or film productions), and select cryptocurrencies. Quest Trust Company’s Individual 401k plan allows the plan holder to act as the Trustee, Custodian and Plan Administrator, giving them complete investment authority to execute investments in the name of the 401k plan, like signing the real estate purchase contract or cutting a check for earnest money.
• How do I use a Solo 401(k) to buy a house? Once your 401K plan and checking account have been set up for investing, you will then locate the house you want to purchase and complete the purchase contract in the name of the 401K plan, and sign as the plan Trustee. Ex: “[401K plan name], [Trustee Name], Trustee”. If earnest money or an inspection is needed, the Trustee would directly pay these expenses from the 401K plan, via the plan’s checking account.

• Proper record keeping is essential for a Solo 401k plan to track contributions, investments, and distributions while ensuring compliance with IRS regulations. The IRS mandates accurate documentation of participant and employer contributions, investments, their fair market value, and distributions. It is crucial to retain records of plan-related activities, including loans, for at least six years after the applicable plan year. Maintaining records since inception may be necessary to demonstrate proper plan maintenance. Inadequate record keeping can lead to IRS penalties and operational failures that risk the plan’s qualified status.

• Not properly maintaining records for a Solo 401k plan can lead to a range of consequences from government agencies, including fines and penalties. The Department of Labor (DOL) enforces the Employee Retirement Income Security Act (ERISA) governing 401k plans. Inadequate record keeping may result in fines, penalties, and required plan corrections. The Internal Revenue Service (IRS) enforces tax laws related to 401k plans, requiring proper record maintenance for tax-qualified status. Failure to keep records or operate the plan correctly can cause operational failure and potential plan disqualification. Neglecting record keeping may lead to adverse tax consequences for participants.

• In order for your Solo 401(k) to be safely protected, its important to make a contribution to the account in the year it is established to show that the account is in fact being used for the correct and legitimate purpose. 401ks are classified as defined contribution plans, which are designed for the employee and or employer to contribute too. It is always best to check with your CPA if you have questions about legitimizing.

• Yes, you can contribute to both your Solo 401(k) plan and your IRA in the same year. Since you are also contributing to a Solo 401(k) plan, the IRA contributions may not be fully tax deductible. It comes down to your modified AGI (adjusted gross income), which means you may be able to deduct some of your IRA contribution.

• If you are self-employed or have income from freelancing, you can still open a Solo 401(k) plan. You won’t be able to make pretax or Roth Solo 401(k) contributions if you have already maxed out these contributions to your day job employer 401(k) plan, but you will still be able to make profit sharing contributions to the Solo 401k plan.

• You can sign up for a Solo 401k only if all of your employees are also owners of the company. With the 2019 SECURE Act, Employers must now allow long-term, part-time employees – defined as employees that complete at least 500 hours of service annually for three consecutive years – to make 401k salary deferrals. Prior to the Secure Act, employers could keep out part-time workers that never completed more than 1,000 hours of service in a year. This change is effective for plan years beginning after December 31, 2020. Hours of service before 2021 do not count.

• If a common law, non-owner employee is hired, the Individual 401K plan is no longer an eligible employer plan option. Prior to hiring, the non-owner employee, the employer should consider adopting a Self-Directed Safe Harbor 401K plan or terminating the 401k plan for rolling over to an IRA.

• No, you would need to obtain a separate EIN (Employer Identification Number) for the Solo 401k from the IRS since a Solo 401k is a retirement trust not a business (see above for how to apply for and EIN)

• If your spouse performs services and receives compensation from the business, they can participate in the same Solo 401(k) plan. The maximum amount they can save also depends on income, age, and salary. A Solo 401(k) is for business owners and their spouses.

• Unlike an IRA where one spouse can contribute to the other spouse’s IRA (spouse IRA) based on the contributing spouse’s earned income if certain rule are satisfied (e.g., both spouses file a joint tax return-Form 1040), the same rule does not apply to a solo 401k plan. However, if you both work for the same self-employed business that sponsors the solo 401k, you can participate in the same solo 401k plan and contribute to the solo 401k plan based on your respective net self-employment income. Check with your CPA, as you may be able to get creative in allocating earned income if you both work for the same business.

I have a self-directed Traditional IRA that holds private investment and I want to know if I have to liquidate or can I transfer it to a Solo 401k plan?

• If the individual is self-employed with no full-time W-2 employees, he or she can set up our Solo 401k plan which allows for alternative investments such as private placements, syndicated real estate financing transactions, etc. provided that the investment is a passive investment (e.g. the person is not otherwise involved with the investment provider such as working for the provider nor involved with the underlying real estate in the case of a real estate fund such as using the underlying real estate property).

• The deadline for setting up a Solo 401k plan is typically the end of the business’s tax year, which is December 31st for most businesses. This means that you must establish the Solo 401k plan, adopt a written plan document, and sign a plan adoption agreement by December 31st to make contributions for that tax year. The deadline for making contributions to a Solo 401k differs based on the type of contribution and business structure:

1. Employee contributions: These must generally be made by the individual’s tax filing deadline, including extensions (usually April 15th or October 15th with an extension).
2. Employer contributions: The deadline varies depending on the business structure:

• • Sole proprietorships and single-member LLCs: The deadline is the tax filing deadline, including extensions 
  • Partnerships, multiple-member LLCs, and S corporations: The deadline is the business tax filing deadline, including extensions 
  • C-corporations: The deadline is the corporation’s tax filing deadline, including extensions 

• Contact an IRA Specialist or visit our education center where you will find helpful blogs, videos, and other resources.