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Understanding your options for Solo 401ks in 2020

Understanding your Solo 401(k) options in 2020

If you are a business owner and do not have any employees, a Solo 401k may be the right fit for you. Here you’ll find out all about Solo 401ks and why one might or might not be a good fit for your business and personal retirement needs.

Tax-Deductible Contributions

• Solo 401ks offer relatively large limits of up to $57,000 in 2020 with an additional $6,500 catch-up contribution if you are at least 50 years old.

• As the business’ employee, you can contribute up to $19,500 in 2020, or 100% of compensation, whichever is less. Those 50 or older get to contribute an additional $6,500 here.

• As the business’ owner/employer, an additional profit-sharing contribution of up to 25% of your compensation can be made. The limit on compensation that can be used to determine your contribution is set at $285,000 for 2020. Ability to add

Roth contributions

• Roth 401(k): Contributions are made with after-tax dollars and if held until full retirement age 59 ½ and a min of 5 years, withdrawals are tax-free.

• Roth contributions have the same $19,500 in 2020, or 100% of compensation limit as the pre-tax option.

Solo 401k Plans Provide Creditor Protection

• Generally speaking, 401k plans are protected from creditors in the event of bankruptcy. The ability for you to shift business assets, which are subject to seizure, to a protected Defined Benefit asset can be a big advantage and add another layer of protection.

Self-Employed Spouses Further Increase Tax Deductions

• If the business owner’s spouse is an employee, savings could be greatly increased. While you do need to factor in your spouse’s salary and role in the business, adding a spouse to your plan can provide the potential to double both contributions and tax savings.

Under what circumstances might a Solo 401(k) not be the right choice?

• If your plan has assets of over 250,000, You will be required to recordkeeping and TPA (Third Party Administrator) services to manage your plan’s contributions and keep you in line with IRS guidelines and you will need to be prepared to pay this every year.

• If you can’t leave the funds in the account until age 59 1/2. Solo 401(k)s are never a good place for money needed for emergencies or business cash flow. It should always be view as long term investment, otherwise, you may be subject to a -10% IRS early withdrawal penalties.

• If you have or planning on hiring any employees that are not a spouse or immediate family member, you will not be eligible to have a Solo 401k. If you have a Solo 401k already and Then hire an employee you will need to switch to a regular 401k plan.

Anything else you need to consider?

  • Your business will need an EIN number of its own to open a Solo 401k, in order to open a Solo 401k, you must be incorporated.

  • You will likely need a Financial Planner knowledgeable with Employer-Sponsored Retirement Plans to help you set up your Defined Benefit Plan and understand all of your options and make sure you Make sure to engage a knowledgeable CPA.

  • Unless your partner is your spouse, a Solo 401k won’t work for a partnership. Hence, the name “solo” 401k. It’s made only for a single operator and their immediate family members who are a part of the business.

  • If you want to make a contribution for this year, your plan must be established by Dec. 31, 2020, and you must make your employee contribution by the end of the calendar year. You can typically wait to make the employer profit-sharing contributions until your tax-filing deadline for the tax year.

Still have Questions?

Reach out to one of the Advisors at LA Wealth Management to ask about your specific situation.

Laurie Allen, CFP

(310) 984-0082

Laurie@lawealthmanagement.com

www.LAWealthManagement.com

Sources:

https://www.irs.gov/retirement-plans/one-participant-401k-plans https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sharing-plan-contribution-limits

Securities and Investment Advisory services offered through GWN SECURITIES, Inc. A Registered Investment Advisor .11440 N Jog Road, Palm Beach Gardens, FL 33418 561-472-2700, Member FINRA, SIPC LA Wealth Management and GWN SECURITIES, Inc. are not affiliated. Information provided should not be considered as tax advice from GWN Securities, Inc. or it’s representatives. Please consult with your tax professional.

Laurie Allen