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Solo Employee 401(k) | Friendly 401k

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How would you like to save over $100,000 a year for retirement?

If you are a doctor, a high-earning consultant, or a microbusiness owner, you may face a financial dilemma. Your retirement savings may be scant, so your prospects for a comfortable retirement may depend heavily on your business or practice outcome.

How do you answer that dilemma and build retirement savings in a timely manner?

One potential way is to use two retirement planning vehicles in tandem: a solo 401(k) that allows for profit-sharing and a cash balance defined benefit pension plan. If you are self-employed, this may be a great option. It can even be utilized if you work for someone else, yet earn contract income or business income on the side.

If you earn less than $265,000 annually, you can use a Solo 401(k) to save for retirement in two ways. Under current IRS rules, you can direct up to $18,000 a year in salary into a Solo 401(k) ($24,000 if you are 50 or older). Your total contributions cannot be greater than your self-employment income for the year. When you are a sole proprietor, your business or practice can also make a yearly profit-sharing contribution to the Solo 401(k) on your behalf, a contribution that can be as large as 20% of its annual revenue.1,2,4

The yearly limit on total Solo 401(k) employee and employer contributions is currently $53,000 ($59,000 if a participant is 50 or older). You can even create a Roth Solo 401(k), giving you the potential for tax-free retirement income withdrawals.1

That is only half the story. When you have a Solo 401(k), you are also allowed to contribute to a cash balance defined benefit pension plan.3

The annual contribution limits for a Solo 401(k) will rise with age. A 45-year-old may contribute up to $112,200 to such a defined benefit plan. A 60-year-old may contribute as much as $236,800. In many cases, the lump sum accumulated in the cash balance plan may be taken in cash when the owner retires or leaves the business, an option sometimes absent in a traditional pension plan.3,4              

When you have both a solo 401(k) and a cash balance defined benefit pension plan, the annual profit-sharing percentage for your business or practice is reduced to 6% from the standard 20%, a minor drawback given the vastly increased retirement saving potential these plans offer in combination.3,4

You must follow the rules. A Solo 401(k) is only permitted for the smallest businesses. The business is only allowed to have one other employee beside yourself, and that employee must be your spouse. Once you hire other employees, you turn your Solo 401(k) into a regular 401(k).5

Your income must be consistent for this retirement saving strategy to work. You will also pay significant yearly administrative expenses to keep up the accounts ($2,000-3,000 a year is not uncommon), and you have to file IRS Form 5500 when a Solo 401(k) grows larger than $250,000. A Solo 401(k) has no IRS reporting requirements if it contains less than $250,000.4,5

A Solo 401(k) has to be up and running by December 31 of the tax year in which contributions are first made. Initial contributions to a Solo 401(k), however, can be made as late as April 15 of the following year (or October 15, with an extension) if your business or practice is a sole proprietorship, an LLC taxed as a sole proprietorship, or a partnership.1,5

The combination of a Solo 401(k) and a cash balance defined benefit pension plan could potentially help a doctor, consultant, or microbusiness owner make strides toward retirement savings goals. Would you like to learn more?

Simply call us at 1-(866)-481-3597 or email us at today.


1 - [12/3/15]

2 - [2/4/16]

3 - [3/1/15]

4 - [1/14/16]

5 - [2/21/16]