Careful review of the IRS publications related to Solo 401(k)s may seem confusing. There are many rules and regulations and it takes time, effort, and perhaps some aspirin to sift through them all.
James C. Hitt, CEO of American IRA, LLC, brings this alert to everyone in hopes of simplifying some of the more commonly asked questions in relation to establishing and contributing to a Solo 401(k).
The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) created the Solo 401(k) in order to provide benefits to businesses whose only employees are the owner or the owner and their spouse. EGTRRA finally brought some tax relief to these hard working entrepreneurs as the contributions are generally 100% tax deductible.
Some of the high-lights of a Solo 401(k) are high contribution limits (including generous “catch up” contributions for those 50 years old and older) and the flexibility to borrow, up to $50,000 from the retirement plan penalty free before reaching retirement age. Funding limits are also optional allowing the plan owner to contribute as much or as little as they like up to the contribution limit for the tax year they are in. They can even opt to contribute nothing at all during a tax year–that’s correct, if the business owner wishes to allocate his capital to other areas and they do not want to contribute to their Solo 401(k) that year–they can decide not to contribute to the fund that year.
Important Dates for unincorporated businesses:
Deadline to establish a Solo 401(k): December 31st of the year in which they want to take the tax deduction.
Deadline for making salary deferral contributions: April 15th of the following year plus extensions (i.e. for 2011, the deadline is April 15, 2012)
Deadline for making profit sharing contributions: April 15th or October 15th if an extension is filed.
Important Dates for incorporated businesses:
Deadline to establish a Solo 401(k): Fiscal Year End
Deadline for making salary deferral contributions: 15 days from the close of the Fiscal Year End
Deadline for making profit sharing contributions: March 15th plus extensions
With December 31st fast approaching it is time to take action for those that want to establish a new Solo 401(k). James C. Hitt, CEO of American IRA, says “Our clients who have self-directed their Solo 401(k) describe it as a 401(k) on steroids! They enjoy the benefits of a Solo 401(k) and they supercharge it by making it self-directed which allows them to invest in a variety of assets such as real estate, private lending, limited liability companies, precious metals and much more!”