Solo 401k: The Swiss Army Knife of Retirement Plans for the Self-Employed
By: Thomas W. Spray-Fry, CFP®, ChFC®, CLU®, CRPC®
The Solo 401(k), otherwise known as the Uni-k, Solo-k, or One-Participant k, is one of the most versatile retirement planning tools for those who are self-employed with no additional employees other than a spouse.
This plan allows elective deferral contributions of up to 100% of earned income for self-employed individuals. In 2019, this equates to $19,000 or $25,000 (over age 50 comes with a $6,000 catch-up contribution). Solo 401k plans also allow you to make an additional profit-sharing contribution into the plan. The maximum allowable amount is $56,000 ($62,000 if you are over age 50 and use a catch-up contribution). Note: please see your tax advisor for assistance in computing the amount that you will be eligible to contribute to the plan, as you must take eligible amounts into consideration.
So why is this plan the Swiss Army Knife of retirement plans?
Solo 401(k) plans have several features not available on other self-employed retirement plans. The first is the ability to make your elective deferral as a Roth contribution. A Roth contribution is an after-tax contribution that will grow tax-deferred and provide qualified distributions that will be tax-free in retirement. We all have those years where taxable income is low. These might be good years to make your contribution a Roth. Of course, you can always fund the elective deferral as tax-deductible depending on your personal preferences and tax planning strategies.
Profit sharing contributions can be made to Solo 401(k) plans that, depending on your income, can allow you to contribute up to $56,000 per year. This is a great tool for those years where you get that call from your accountant that you made too much money and will have a higher than anticipated tax liability. You have until your tax filing deadline, plus extensions, to make this contribution for the prior year.
Solo 401(k) plans permit loans, offering a way to access funds without a taxable event. This is just like any other loan in the fact that a repayment schedule must occur. The most common is repayment over a 5-year period. When you pay the loan back, you pay yourself back the interest. This allows you the flexibility to access up to 50% of the vested account balance ($50k max) without having to go through the normal underwriting process and time frame of a traditional loan.
As you can see, Solo 401(k) plans offer flexibility to meet a wide variety of retirement saving needs.
Tom Spray-Fry is a CERTIFIED FINANCIAL PLANNER™ Practitioner with 20 years of experience with retirement plans and financial planning. He can be reached at 410-771-5675 or via email at Thomas.Spray-Fry@LFG.com.
Heritage Financial Consultants, LLC is a marketing name for registered representatives of Lincoln Financial Advisors. Securities and investment advisory services offered through Lincoln Financial Advisors Corp., a broker-dealer and registered investment advisor, member SIPC. Heritage Financial Consultants, LLC is not an affiliate of Lincoln Financial Advisors Corp.