Solo 401(k) With an LLC
Solo 401k plans are among the most popular retirement options for self-employed individuals, enabling you to invest both traditional investments as well as alternative assets such as real estate.
Individual 401k legislation permits any business entity, such as sole proprietorships, partnerships, LLCs, or corporations, to become sponsors for individual 401k accounts.
To qualify for a Solo 401k, your net adjusted business profit income must not exceed $57,000 – this means all earnings minus expenses and half of self-employment tax paid.
What is a Solo 401(k)?
Solo 401(k) plans are retirement savings vehicles designed for self-employed individuals or small businesses that only allow the owners of the business to contribute, in contrast to SEP IRA plans which can allow any employee to participate regardless of income levels. Sometimes owners may allow spouses of employees who work more than 1,000 hours annually participate as well.
Your Solo 401(k) provider gives you access to a range of assets, such as index funds, mutual funds, ETFs, stocks and bonds – as well as alternative investments such as real estate or gold. Although fees associated with Solo 401(k) accounts differ depending on their provider – according to Allec Financial Services Firm which offers Solo 401(k) accounts the costs should generally fall between $20 and $200 annually according to Allec’s reports on account maintenance.
Can I have a Solo 401(k) with an LLC?
Solo 401(k) accounts are designed specifically to meet the retirement savings needs of self-employed individuals and small business owners, enabling both employees and employers to contribute. They also allow investors to invest in alternative assets – making a Solo 401(k) an excellent way for entrepreneurs to increase their retirement savings.
To qualify for a Solo 401(k), you must be a sole proprietor or operate a business without full-time employees and report your income on Schedule C of your individual tax return.
Cynthia runs an LLC used for house flipping. She pays her husband a salary as part-time bookkeeper for the business and hires contractors on a 1099 basis to complete rehab work on property rehabs. Cynthia could sponsor a Solo 401(k), however if her LLC had $250,000 or more assets at year end she must file Form 5500-SF with the IRS.
Can I have a Solo 401(k) with a Multi-Member LLC?
As its name implies, a Solo 401(k) can only be established by sole proprietors or single-member LLCs with no full-time employees. However, this does not preclude businesses from hiring part-time workers who complete less than 1,000 hours annually.
One common misperception about Solo 401k plans is that any business with partners is disqualified; this is false – regardless of its structure, all that’s required is that no full-time employees exist within your business.
Even if you already participate in another retirement plan such as a 401(k), SIMPLE IRA or SEP IRA, a Solo 401(k) can still be sponsored – provided your combined employee and employer contributions do not exceed $22,500 in 2023. When adding eligible employees, however, nondiscrimination testing and compliance issues must be handled; you will also need to file Form 5500-SF annually.
Can I have a Solo 401(k) with a Multiple-Member LLC?
Solo 401(k) plans aren’t an option for LLCs with multiple owners/partners; however, single-member LLCs that are taxed as sole proprietorships or partnerships can adopt one. Contributions up to the plan limit of $20,500 in pretax or after-tax dollars (and an extra catch-up contribution for those over 50) are permitted by members in pretax or after-tax dollars while employer profit sharing contributions up to 25% of compensation may also be made by each member of a single-member LLCs that qualify.
If the member has a spouse earning income from the business, they can contribute on their behalf up to the plan limits – $61,000 for those under 50 and $67,500 for those over 50. Furthermore, using this plan combines income from various self-employment businesses. Once including other eligible employees into their plan, compliance testing must also be performed which adds complexity and costs associated with plan administration processes.
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