Now’s The Time to Set Up a Self-Directed 401k

If you’re a small business owner, sole proprietor or independent consultant, now’s the time to think about self-directed 401Ks.

That’s because unlike IRAs, you don’t have until April 15th of next year to contribute to your Self-Directed 401K plan for tax year 2015. For most business entities, your real deadline to make 2015 contributions is March 15th, 2016. However, if you are deferring self-employment income rather than the income of a corporation or LLC into a 401(k), you can contribute until April 15th for tax year 2015.

But you can only make contributions for tax year 2015 if you already have a plan set up. And the deadline to get a new plan set up is not March 2016, but the end of the year.

How Much Can You Contribute?

Solo 401(k)s, sometimes called ‘individual 401(k)s, are a little different than IRAs and SEP IRAs. With Solo 401(k)s, you are at once the employee and the employer. So the law allows you, as an employee, to defer up to $18,000 of income, or up to $24,000 if you are age 50 or older in so-called ‘catch-up; contributions.

On top of that, as your own employer, you can have your business kick in up to 25 percent of compensation (as defined by the plan you set up). Combining the two, you can actually contribute up to $53,000 for the tax year, or $59,000 if you are age 50 or older.

But you can’t contribute for this year unless you have your Solo 401(k) plan up and running, by the end of the year.

The deadlines for Self-Directed 401K owners are the same as those for 401(k)s, generally.

Who can establish a Solo 401(k)?

Generally, you can establish a Solo 401(k) if you are a sole proprietor, you own a partnership with your spouse, or you own an S Corporation with no eligible employees other than yourself and your spouse, or if you are an individual with self-employment income.

If you are considering adding employees in the next year or two, besides your spouse, the solo 401(k) plan may not be the best plan for you.

How do you benefit?

Contributing to a solo 401(k) allows you to defer taxes on every dollar you can contribute, up to a cap of 25 percent of the compensation of every participant. Normally that is just you, or you and your spouse.

In addition to tax deferral, the 401(k) structure is a very potent shield against the claims of creditors, who typically cannot seize assets within 401(k)s and other employer pension plans. Protections are somewhat less for inherited IRAs, according to recent case law.

You can also set up your solo 401(k) to allow for borrowing from the plan, if you so choose. Usually, you can borrow up to 50 percent of the assets in your plan for any purpose you choose. Just pay yourself back, along with interest, within 5 years. If you don’t pay off your loan from your 401(k), the IRS will deem you to have made a taxable distribution, and you may be responsible for interest and penalties on the unpaid balance.

American IRA, LLC is a leading national administrator for Self-Directed 401K accounts. Our services allow you to liberate your 401(k) from the investment and mutual fund companies, and provide you the freedom to direct your investments into any number of other asset classes that can help you increase potential returns, diversify your portfolio or reduce your risk – or some combination of the three.

Again, if you don’t already have a solo 401(k) set up, and you’d like to shelter significant sums of income from taxation for 2015, time is running out. Act now to get your plan set up in time for you to contribute.

For more information, visit us online at and download our exclusive guide to self-direction and solo 401(k)s. Or give us a call today at 866-7500-IRA(472). We look forward to hearing from you.