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PENSCO Blog

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Give Yourself the Gift of Savings With 401k Retirement Plan

Egg in nest

  |  By Christopher Orr, SDIP

If you are self-employed and looking to lower your taxes, you may want to consider opening a Solo 401(k) retirement plan before closing the books on 2016.

A Solo 401(k) plan is essentially a 401(k) plan for a self-employed individual, which is why these plans are also called Solo(k)s, Individual 401(k)s, and One-Participant 401(k)s. While it may be one of the least understood options for self-employed small business owners, Solo 401(k)s are  a great way for self-employed individuals to maximize retirement savings with either pre-tax or after-tax contributions. As always, you should consult with your tax advisor or financial advisor to determine which retirement plan option is best for you.

Here are the basics of a Solo 401(k) plan:

Who Qualifies?

Sole proprietors or small business owners who have no full-time employees can establish a Solo 401(k) plans. Spouses may also be able to participate; talk to your tax advisor to determine if he/she qualifies.

How Does It Work?

Solo 401(k) plans can be a powerful tool for the self-employed because, according to the IRS, they allow the business owner to wear two hats – as both the employee and employer. This means the business owner may not only make employee salary deferral contributions to their Solo 401(k), but they may also make an employer contribution. 

What Type of Investments Can I Own in my Solo 401(k)?

Solo 401(k) plan investments vary based on plan documents and the custodian, so be sure to check on the details before establishing one. Solo 401(k) plans where PENSCO serves as custodian, allow participants to invest in alternative assets, like real estate, private equity, and notes. Participants can fund their Solo(k) plan through various contribution types including salary deferrals, employer discretionary contributions (if elected by the employer), and rollovers. 

What Are Solo 401(k) Contribution Limits?

Because there are different contribution limits on the various types of contributions offered in a Solo 401(k), consulting with a tax advisor to discuss your personal limits is strongly recommended. Generally speaking, in the 2016 (and 2017) tax year, participants under the age of 50 can defer up to $18,000 in elective salary deferrals, while those who are 50 and older can contribute an additional $6,000 for a total salary deferral of $24,000.   The maximum amount of contributions (the total of salary deferral and employer contributions) for 2016 is $53,000 ($54,000 in 2017).

As you can see, the Solo(k) plan allows you to contribute a great deal for your tax sheltered retirement income.

Additional Items to Keep in Mind:

  • Just like a 401(k) plan for a large company, PENSCO requires that you have a third-party administrator for record keeping and certain reporting purposes.
  • The deadline to establish  a Solo(k) plan is the end of your company’s fiscal year-end. Keep in mind that additional time is needed to process the plan’s paper work, so the sooner you can get started with establishing your Solo 401(k), the better.

To learn more about how PENSCO can help, please contact our Business Development Center at 866-818-4472. 

This Blog does not provide investment, tax, or legal advice nor does it evaluate, recommend or endorse any advisory firm or investment vehicle. Investments are not FDIC insured and are subject to risk, including the loss of principal.

PENSCO Trust Company performs the duties of an independent custodian of assets for self-directed individual and business retirement accounts and does not provide investment advice, sell investments or offer any tax or legal advice. Clients or potential clients are advised to perform their own due diligence in choosing any investment opportunity as well as selecting any professional to assist them with an investment opportunity. Alternative investments are not FDIC insured and are subject to risk, including loss of principal. Other than the Opus Affiliates, PENSCO is not affiliated with any financial professional, investment, investment sponsor, or investment, tax or legal advisor.