Solo 401k With an LLC
Solo 401ks offer business owners many of the same advantages found in employee-sponsored plans. While it’s often assumed that sole proprietors are eligible to create these retirement accounts, any legal entity can sponsor one as long as there are no non-owner full-time employees working full time for it.
Your spouse could be an exception to this rule if they earn income from your business, enabling them to take advantage of elective deferrals up to the annual limit and receive employer profit-sharing contributions.
Taxes
As with any retirement plan, taxes must be taken into consideration when operating Solo 401ks. One tax that specifically affects these accounts is Unrelated Business Income Tax (UBIT), which applies to businesses that generate profits through investments like passive income or rental properties.
One-member LLC owners may sponsor a Solo 401k and make employee deferral contributions up to the plan limits of $20,500 in 2023 or $27,000 if over 50. Furthermore, Solo 401k plans allow up to 25% employer profit sharing contributions.
People may hold both a Solo 401k and an incorporated business, provided the latter does not employ non-owner full or part-time employees who contribute more than 1000 hours annually (excluding themselves). A single member LLC would fit this description perfectly; Cynthia flips houses through this type of entity while operating her real estate services via an S-corp for example.
Funding
An LLC with its own Solo 401k provides more investment options than an IRA can, specifically when investing in alternative assets like real estate and precious metals. Furthermore, having such an account provides tax benefits while protecting against personal debts or bankruptcy.
An LLC is the ideal vehicle to set up a Solo 401k because it acts as a pass-through entity and doesn’t pay federal income tax like C corporations do.
For a business to qualify as an Solo 401k, certain requirements must be fulfilled. These include no full-time employees other than its owner or spouse and ownership by neither must exceed 50%. Furthermore, an affiliated service group (where more than five businesses share ownership with or belong) cannot own more than 80%.
Operating Agreement
Contrary to traditional 401ks, which require employees to contribute on behalf of business owners, Solo 401ks can be opened by sole proprietors, partnerships, LLCs, S corporations and C corporations with no non-owner employees as employees.
Operating agreements of LLCs should include an in-depth definition of roles for all members. Furthermore, disqualified persons and what investments may be purchased using the 401k must also be noted and the bank accounts for both entities must remain separate.
Special purpose LLCs are crucial because they protect 401k members’ assets from lawsuits filed against their business, and can make investing easier as title companies are more used to seeing investors listed as an LLC, saving both time and fees.
Trust
An LLC provides many great financial benefits when choosing to establish your Solo 401k. One common use case involves property purchases. When closing, real estate agents or title companies typically request your 7-page Trust Agreement instead of investors showing up as trustees and risk delays as a result of incorrect documentation.
IRS rules stipulate that plans cannot invest in businesses where participants are members; however, if you own multiple self-employment businesses that generate self-employment income and generate self-employment tax deductions for themselves or your spouse (include them if applicable), Solo 401k plans are an excellent way to invest in qualifying businesses and add tax relief and potential future compensation opportunities to them.
LLC structures provide another layer of asset protection when combined with Solo 401k accounts. While not the primary reason, using an LLC gives you more options for estate tax planning by providing primary and contingent beneficiaries.
Categorised in: Blog