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Simply put, a Solo 401(k) is a retirement account designed for the self-employed, or business owners with no full-time employees. A Solo or Individual 401(k) plan offers many of the same benefits of a traditional 401(k) with a few distinct differences.
A traditional 401(k) is offered by a company allowing employees to save for retirement by contributing to their own accounts directly from their pay. Sometimes the company also contributes to each employee's account. With an Individual 401(k) business owners can make contributions both as an employee and as an employer, maximizing retirement contributions and business deductions. Also, spouses who derive income from the business can make contributions to their account as well. Plus, if the business owner's spouse makes contributions as the employer, the non-owner spouse would also get a contribution from the business at the same percentage. Additionally, small businesses with multiple business owners can also use the plan, just remember that the business sets up one plan with all the owners as participants, thus all owners follow one set of rules.
Is a Solo 401(k) plan right for you? Learn more below or take a look at our Solo 401(k) Guide for more details. When you're ready, speak with a TD Ameritrade representative at 800-472-0586 to get started.
What are the potential tax benefits of a Solo 401(k)?
In a Solo 401(k) plan all contributions you make as the "employer" will be tax-deductible (subject to IRS maximums) to your business with any earnings growing tax-deferred until withdrawn. Typically, your employee "deferral" contributions reduce your personal taxable income for the year and can grow tax-deferred, with distributions in retirement taxed as ordinary income. Beginning December 1, 2022, the TD Ameritrade plan no longer allows Roth Solo 401(k) plan contributions. Generally speaking, there are tax penalties for withdrawals from a Solo 401(k) before 59 1/2 so be sure to know the specifics of your plan.
What are the contribution levels and limits of a Solo 401(k)?
To take full advantage of contributions to a Solo 401(k) plan you must understand your limits as an employee and employer, as well as contributions allowed on behalf of a spouse if applicable.
When contributing as the employee, you are allowed up to $20,500 or 100% of compensation (whichever is less) in salary deferrals for tax year 2022. If you are over 50, an additional $6,500 catch-up contribution is allowed bringing the total contribution up to $27,000. Employee salary deferal contributions for 2023 are 100% of compensation up to $22,500 ($30,000 for age 50 and older). Additionally, as the employer, you can make a profit-sharing contribution up to 25% of your compensation from the business. When adding the employee and employer contributions together for the year the maximum 2022 Solo 401(k) contribution limit is $61,000 and the maximum 2023 solo 401(k) contribution is $66,000. If you are age 50 and older and make catch-up contributions, the limit is increased by these catch-ups to $67,500 for 2022 and $73,500 for 2023.
Compensation from your business can be a bit tricky. This is calculated as your business net profit minus half of your self-employment tax and the employer plan contributions you made for yourself (and other business owners and any participating spouses who are also in your Solo 401(k) plan). The limit on compensation that can be factored into your tax year contribution is $305,000 for 2022 and $330,000 for 2023.
A Solo 401(k) can only be used by business owners who have no employees eligible to participate in the plan. You will set up your plan eligibility requirements in the Solo 401(k) plan documents used to establish your plan legally. The IRS has set limits on when employees must be included in your plan, so be sure to follow the rules. If an employee meets your plan eligibility, then you must include them and begin following certain testing and discrimination rules, which may require you to hire a benefits consulting or administration firm to help you. The one exception to the no-employee rule for a Solo 401(k) is for a spouse who earns income from your business. For 2022, your spouse can contribute up to $20,500 ($22,500 for 2023) as an employee (plus the catch-up provision if 50 or older), and you can make the same percentage of employer contribution that you made for yourself (up to 25% of compensation). In 2023, this contribution limit is increased to $22,500 as an employee (plus the catch-up provision). This exception effectively allows you to double the amount you can contribute as a family.
How do I open a Solo 401(k)?
Give us a call at 800-472-0586 to order a complete Individual 401(k) kit. We'll provide you with an adoption agreement, and a basic plan document to meet your legal plan requirement. It is best if you obtain an Employer Identification Number for your business as well. We also provide you with a Participant Application to open your investment accounts. Once you have gone through these steps you will be able to set up your contributions. Check out our Solo 401(k) Guide for more in-depth details.
Solo 401(k) important dates and deadlines
In order to make a contribution for the year, you must establish your Solo 401(k) plan by your business's tax filing deadline including extensions. But you must make your employee deferral contribution election by the end of the calendar year. Keep that election in your tax files. Unless your business is incorporated, you can make the contribution once you have calculated your net business income for the year, but no later than your tax filing deadline including extensions. Employer profit-sharing contributions can also be funded up until your tax return due date, plus extensions. If your business in incorporated, you must make your deferral contributions in the same tax year.
Solo 401(k) withdrawals and details
As with all qualified retirement plans, there are rules to when you can and must start taking withdrawals from your Solo 401(k) plan. You must begin taking the minimum required distribution no later than age 73 (unless you turned 72 prior to January 1, 2023, then your RMD's must begin by 72. Those who turned 70 1/2 prior to January 1, 2020 had to start RMD's at 70 1/2). There is a 10% early withdrawal penalty for distributions take before age 59 1/2, but exceptions may apply.
Please refer to the IRS page on individual 401(k)s and review our Solo 401(k) Guide for additional details.
Administering a Solo 401(k) plan
Once your Solo 401(k) plan exceeds $250,000 in assets at the end of the year, the IRS requires you file an annual Form 5500 EZ. Or if you ever terminate the plan, you must also file a Form 5500 EZ.
Unlike Traditional 401(k) plans, there are no compliance testing requirements to ensure Solo 401(k) plans do not favor highly compensated employees and are non-discriminatory, as long as you have no employees participating in the plan.
These plans can be called Self-Directed 401(k), Individual 401(k), Individual Roth 401(k), Self-Employed 401(k), Personal 401(k) or One-Participant 401(k) depending upon the vendor offering the plan services.
Important Plan Provision Changes: New plan loan provisions are no longer offered in the TD Ameritrade Individual 401(k) plan. All outstanding plan loans must be paid off by May 31, 2022 to continue to use the TD Ameritrade plan document. Roth 401(k) deferral contributions in the Individual 401(k) plan will no longer be accepted as of December 1, 2022.
Find a small business retirement plan that fits you
- A Simplified Employee Pension (SEP) IRA is a plan funded by the business. It allows for tax-deductible contributions that are flexible and grow tax-deferred, making it a consideration for businesses with varying profits.
- A Savings Incentive Match Plan for Employees (SIMPLE) allows both employer and employee to contribute to employee retirement accounts with tax-deductible employer contributions. It enables employees to make pre-tax salary contributions and may be a consideration for businesses with steady profits.
- Profit-Sharing plans reward employees with a percentage of company profits, but do not have to be profit based. Employer contributions are discretionary and tax-deductible to the business.