In this episode of AdBits, Adam Bergman, Esq. starts a five part series of Solo 401(k) rules that you need to know. Today’s video covers important rules for a sole proprietor.
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IRA Financial was founded by Adam Bergman, a former tax and ERISA attorney who worked at some of the largest law firms. During his years of practice, he noticed that many of his clients were not even aware that they can use an IRA or 401(k) plan to make alternative asset investments, such as real estate. He created IRA Financial to help educate retirement account holders about the benefits of self-directed retirement plan solutions.

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As a sole proprietor, you have the option of establishing a Solo 401(k) plan for your retirement needs. A Solo 401(k) plan is a tax-advantaged retirement plan designed for self-employed individuals or business owners without full-time employees, except for a spouse. Here are the Solo 401(k) rules that you need to know as a sole proprietor.

Eligibility Criteria:

To establish and contribute to a Solo 401(k) plan as a sole proprietor, you must meet the following eligibility criteria:

– You must be a self-employed individual, sole proprietor, or LLC member.
– You should have no full-time employees (other than a spouse who is not a business partner)
– You should have an earned income from your business.

Plan Contribution Limits:

The contribution limits for a Solo 401(k) plan for sole proprietors are higher than traditional Individual Retirement Accounts (IRAs). As of 2021, you can contribute up to $19,500 (or $26,500 if you are over 50 years old) from your earned income to your Solo 401(k) plan as an employee contribution. You can also make an employer contribution of up to 25% of your net self-employment income. The total contribution limit is $58,000 (or $64,500 if you are over 50 years old).

Plan Administration:

As a sole proprietor, you can act as both the employer and employee of your Solo 401(k) plan. Therefore, you can oversee the plan’s administration and invest your plan assets according to your retirement goals. You can also choose from a wide range of investment options, such as stocks, bonds, mutual funds, and real estate.

Plan Distributions:

You can take distributions from your Solo 401(k) plan after reaching the age of 59 ½ without any penalty. However, if you take distributions before reaching the age of 59 ½, you may be subject to a 10% early withdrawal penalty. You must also pay taxes on the distribution amount as they are treated as ordinary income.

Conclusion:

Establishing a Solo 401(k) plan can be a beneficial way to save for your retirement as a sole proprietor. By following the Solo 401(k) rules, you can maximize your contributions and take advantage of the plan’s tax benefits. However, it’s essential to consult a financial or tax advisor to ensure that you comply with all the plan’s requirements and regulations.