Remember that rally cry from TV and the movies? Hi, Ho, Silver! Away!
As a business owner, many people who work for themselves see parallels between how they operate and the way the Lone Ranger works.
Taming their market on their own. Doing all the work themselves… sometimes with a sidekick. (Remember Tonto?)
With the TAG Retirement Program | Solo(k) Solution, the Lone Ranger could have opened a Solo(k) to save for retirement! He has an S-Corp (S for Silver? or S for Sole?) Did the Lone Ranger have a spouse? Was the spouse on the payroll as a 1099 employee? If so, a spouse can participate in the Solo(k) plan, as well. What about Tonto? Would he be eligible? This gets a little more technical. If Tonto gets paid as an independent contractor, or 1099, under the TAG Solo(k) Solution he can open his own Solo(k)! Or, under today’s laws, if Tonto and Lone Ranger were spouses, yes, he definitely could be part of the Solo(k).
Business owners know that running a Retirement Plan can consume time they would devote, otherwise, to building their business. TAG’s Solo(k) Solution allows the business owner to create a traditional 401(k) plan covering a business owner with no (eligible) employees, or that person and his or her spouse.
Here are 5 Basic Points to a Solo(k):
1 | What’s in a name?
A Solo(k) plan is sometimes called a:
- Solo 401(k)
- One-participant k
The Solo(k) plan isn’t a new type of 401(k) plan. It’s a traditional 401(k) plan covering a business owner with no (eligible) employees, or that person and his or her spouse. These plans have the same rules and requirements as any other 401(k) plan.
2 | Contribution limits in a Solo(k) plan
The business owner wears two hats in a 401(k) plan: employee and employer. Contributions can be made to the plan in both capacities. The owner can contribute both:
- Elective deferrals up to 100% of compensation (“earned income” in the case of a self-employed individual) up to the annual contribution limit:
- $18,500 in 2018, or $24,500 in 2018 if age 50 or over; plus
- Employer nonelective contributions up to:
- 25% of compensation as defined by the plan, or
- for self-employed individuals, see discussion below
Total contributions to a participant’s account, not counting catch-up contributions for those age 50 and over, cannot exceed $55,000 (for 2018; $54,000 for 2017).
Example: Ben, age 51, earned $50,000 in W-2 wages from his S Corporation in 2018. He deferred $18,500 in regular elective deferrals plus $6,000 in catch-up contributions to the 401(k) plan. His business contributed 25% of his compensation to the plan, $12,500. Total contributions to the plan for 2018 were $37,000. This is the maximum that can be contributed to the plan for Ben for 2018.
A business owner who is also employed by a second company and participating in its 401(k) plan should bear in mind that his limits on elective deferrals are by person, not by plan. He must consider the limit for all elective deferrals he makes during a year.
3 | Contribution limits for self-employed individuals
You must make a special computation to figure the maximum amount of elective deferrals and nonelective contributions you can make for yourself. When figuring the contribution, compensation is your “earned income,” which is defined as net earnings from self-employment after deducting both:
- one-half of your self-employment tax, and
- contributions for yourself.
Use the rate table or worksheets in Chapter 5 of IRS Publication 560, “Retirement Plans for Small Business,” for figuring your allowable contribution rate and tax deduction for your 401(k) plan contributions. See also Calculating Your Own Retirement Plan Contribution.
4 | Alternatives to a Solo(k) plan
Possible plans for a business owner include:
5 | Additional resources, after all, doesn’t everyone want to read more?
- Small Business Retirement Plan Resources
- Retirement Plans for Self-Employed People
- Penalty Relief Program for Form 5500-EZ filers – file your delinquent returns for a reduced fee
- 401(k) Plans for Small Businesses (Publication 4222) online version (DOL website) or PDF.
- Electronic Filing for One-Participant Plans Video (1:47)