Solo(k)
The Solo (k), or also known as an Individual (k), is often the most attractive plan to sole proprietor and business owners with no employees, if you qualify, because it combines the best elements of the SEP and SIMPLE.
The Solo (k) is designed for owner-only businesses and their spouses. It can be established by both incorporated and unincorporated businesses, sole proprietorships, partnerships and corporations with no common law employees other that your spouse.
Contribution Limits
Since a Solo (k) incorporates both the employer contributions and employee deferral the combined contributions as high $54,500 if you are 50 or over. In 2010 you can contribute through salary deferral up to $16,500 annually and up to $22,000 if you're 50 with the "catch-up" provision. In addition, the employer can make an annual profit-sharing contribution of up to 25% of your salary (20% for a self-employed person) up to a maximum of $49,000 in 2010.
Examples of Solo(k) 2010 Maximum Contributions
2010 Salary |
$50,000 |
$100,000 |
$118,000 |
Solo(k) Deferral |
$16,500 |
$16,500 |
$16,500 |
Catch-up (eligible 50+) |
$5,500 |
$5,500 |
$5,500 |
Profit Sharing |
$12,500 |
$25,500 |
$29,500 |
Total |
$34,500 |
$47,000 |
$51,500 |
Advantages of an Solo(k)
- A Solo (k) is simple to establish and has low plan administration fees.
- There are no annual 5500 filing requirements with less than $100,000 in assets.
- You can take a loan of to up to ½ of your account balance, not to exceed $50,000.
- You can make Roth Contributions of up to $16,500 and $22,000 if 50+.
- Given sufficient income, a husband and wife working for the same business may contribute up to $98,000 combined or $109,000 if age 50+.
- The employer’s contributions are deductible.
Disadvantages of an Solo(k)
- No employee allowed which may limit growth or expansion plans.
- Plan must be typically established by December 31st.
- Deferrals not permitted until the plan is established.
Eligibility
The Solo (k) is ideal for both incorporated and unincorporated businesses, sole proprietorships, and partnerships. The only requirements for setting-up a Solo (k) are that you must receive a salary; and your business entity must have no other employees other than your spouse. In the case of a partnership, the only employees can be your self-employed partners and their spouses.
Note that Solo (k) plan can only be an arrangement maintained by a business that's not included as part of a controlled group under federal tax law. Also, if you were the Trustee of a terminated 401 (k) plan, you must wait 12 months before you can roll over your 401 (k) funds into a new Solo (k).
The deadline for establishing a Solo (k) plan is the last day of your business's tax year (December 31st, for a calendar tax year). However, if a business is incorporated, individuals may want to establish their Solo (k) plan early in the tax year to make employee salary deferrals based on the Form W-2 income throughout the year. This may be necessary because you may not defer on compensation that's paid to you from your corporation before you actually establish the plan.
Distributions
- 59 ½ - 70 ½ - No tax penalty
- Over 70 ½ - There are required minimum distributions if still not working, but may or may not be part of the aggregate total. Each portion of plan handled separately.
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