Solo 401(k)

The Solo 401(k) is often the most attractive plan to investors, if they qualify, because it combines elements of the SEP and SIMPLE. The solo 401(k) is designed for owner-only businesses and spouses. It can be established by both incorporated and unincorporated businesses, sole proprietorships, partnerships and corporations.


Solo 401(k) Benefits

If you qualify, the Solo 401(k) plan is attractive because of the high contribution amounts and large tax deductions available. Two components comprise the maximum Solo 401(k) plan contribution:
  • An employee salary-deferral contribution - The employee can contribute up to $18,000 annually through salary deferral in 2017, although this may not exceed 100% of the employee's pay.
  • An employer profit-sharing contribution - The annual limit for this is 25% of the employee's pay (20% for a self-employed person).
The total annual contribution limit from both sources is $54,000 in 2017 for those under age 50.
 
In 2017, under a "catch- up" provision, individuals age 50 or over may contribute up to $24,000 allowing for a total contribution limit of $60,000.
 

Eligibility

The solo 401(k) is ideal for both incorporated and unincorporated businesses, sole proprietorships, partnerships, and corporations. The only requirement for contributions to this plan is that an individual receives a salary or wage.
 
The business entity must have no additional employees other than the spouse of the proprietor—or, in the case of a partnership; the only employees must be self-employed partners and their spouses. A solo 401(k) plan must be the only arrangement maintained by the business that is not included as part of a controlled group under federal tax law.
 
The deadline for establishing a Solo 401(k) plan is the last day of your business's tax year (December 31, for a calendar tax year). However, if a business is incorporated, individuals may want to establish a Solo 401(k) plan early in the tax year to make employee salary deferrals based on the Form W-2 income throughout the year. This is necessary because you may not defer on compensation that is paid to you from your corporation before you establish the solo 401(k) plan.