401k
401k Information

Solo 401k Plans

Deciding weather or not to roll over your 401k to an IRA can be a difficult decision. After all for many people this is the largest check they will ever get from their employer and they want to make sure they get it right. However there are many advantages that an IRA offers you that your 401k doesn’t. Let’s examine the 5 reasons you might want to move your 401k to an IRA as soon as possible.

Are you familiar with the Stretch IRA? We don’t have the room to explain it in this article but it is one of the greatest gifts the IRS has ever given those of us who have IRA plans. It basically allows you to leave your IRA to your childre 00004000 n or grandchildren and allow them to continue the tax deferral of your IRA over their lifetime. (certain restrictions apply) What does this have to do with your 401k? Many 401k plans do not allow for this option and will force your beneficiaries to cash out your plan much sooner than they would like if they are trying to postpone taxes. Won’t they have to pay tax eventually anyway? Sure but with the Stretch they can delay the tax so long that the compound tax-deferred interest will be so great that the IRS will never catch up. Leaving your money in your 401k may very well prevent you from using this wonderful tax planning tool. If this was the only consideration most people would do the rollover based on this alone but there are many other things to consider.

Another reason rolling the 401k over to an IRA makes since has a lot to do with the first reason. One reason the Stretch does not work well in a 401k is that your plan usually requires that you name a spouse as a beneficiary. Most of the time you and your spouse have about the same life expectancy and so this does not help you defer taxes much longer but it also presents another problem. The other problem is that when doing proper Estate Planning it is often a smart move to name children directly on certain assets to take full advantage of the Estate Planning rules. Doing so will often double how much money a couple can leave to their heirs without having their assets subjected to the dreaded estate taxes. Funds tied up in a company 401k plan do not allow you to name children or grandchildren without a signed waiver from your spouse. This can cause many problems as we get older as having someone sign a consent can become more difficult due to diminished capacity or other concerns. Even if you think this does not apply to you there are still many more reasons to consider rolling over your 401k to an IRA.

Having choices as to where to invest your money is particularly important in these economicly volatile times. When you leave your money in a 401k you can only invest in the options that they give you but if you roll your money over to an IRA the entire investment universe is yours. You can fund an IRA with any mutual fund, or bank CD, or insurance company annuity, or almost whatever you choose. You can even fund an IRA with real estate or gold coins if you want to. But if you leave it in your 401k you can only invest where they let you invest. I don’t know about you but I don’t like people telling me what I can and can’t do with my money. And your company may have great fund choices today but management may decide to go in a different direction tomorrow. I know of one of my clients whose boss changed 401k administrators 3 times during her employment. Each time she was given a new set of mutual funds to choose from. What if you don’t like the choices? What if management does a lousy job of picking your options? You’re stuck.

Here is another control issue for you. With an IRA you have no withdrawal restrictions. You are in complete control and you don’t have to ask permission to get at your own money. However in a 401k plan they may not let you have your money early even it is for something as serious as a personal hardship and you are not yet 59 1/2. And even if they do allow you access getting your hands on that money may take some time. Now if you need cash right away this could put added pressure on you that you just don’t need.

Last but not least IRA’s generally come with more help. Think about it, when you ask for advice on your 401k who do you have to call? Isn’t it usually your human resources department? Are you used to these folks going the extra mile to give you great advice and careful attention? Or do you sometimes gat a less than enthusiastic clerck that really has no interest in your financial success? When you roll over your 401k to an IRA depending where you place it you can often gain access to an advisor who works for you, not your company, and they will often help you customize not only your IRA but your entire retirement plan.

If keeping more control over how you invest or when you can access your money is important to you than you will probably want to roll your 401k over to an IRA as soon as you are eligible to do so. Also if you think you may want to do some tax planning to help you stretch out your tax burden over multiple generations and allow your money to grow to it’s maximum potential and avoid estate tax if applicable than you may also want to roll over your 401k to an IRA as soon as you get the chance.

Frequently Asked Questions

  1. QUESTION:
    Which large brokerages offer Solo-ROTH 401k plans? I cannot find the Roth version of the Solo 401k at any…?
    I cannot find the Roth version of the Solo 401k at any of the major places (Fidelity, Vanguard, etc).

    Also, what sort of yearly paperwork needs to be filled out if the account value is low (I know above 250k you have to submit info to the Dept of Labor).
    I cannot find the Roth version of the Solo 401k at any of the major places (Fidelity, Vanguard, etc).

    Also, what sort of yearly paperwork needs to be filled out if the account value is low (I know above 250k you have to submit info to the Dept of Labor).

    The person who answered below that companies offer Roth 401k’s not Brokerages clearly does not understand what a Solo-401k is. Solo-401k’s are set up by self employed individuals with sole proprietorships or one person corporations.

    • ANSWER:
      Salomon Smith Barney, John Hancock Funds, AIM and Pioneer Investment Management Inc

  2. QUESTION:
    401k plans for 18/19 year olds?
    I’ve been making some decent money for a little bit now and I want to know how I can save the most money (avoid taxes, etc). Originally I wanted to enroll in my company’s 401k but they have a stupid age restriction so, you have to be 21. Are there any providers which offer solo 401k plans for people under 21? If not can I get the same benefits from a ROTH IRA/Reg IRA? Is there an age restriction on that? I know of people who have over 1 million dollars saved up by their retirement and that too was accrued over 15 years or so; I figured if I start now I’ll have a leg up.

    I would really appreciate your guys’ help!!

    • ANSWER:
      Contribute to a Roth IRA or regular IRA. You can contribute up to ,000 or the amount of your earned income for the year, whichever is less.

      Since your tax bracket now is probably fairly low, go for a Roth. You will use after-tax money, but when you take it out, you won’t be taxed, and when you retire, you’ll probably be in a high tax bracket, so this is better.

      If you invest in a regular IRA, you get a tax deduction equal to your contribution. This means that if you contribute ,000 then you don’t pay federal income tax on that ,000. It does not mean that you pay ,000 less in tax. When you retire, you pay income tax on any money you take out, and since you’ll probably be in a higher bracket later than you are now, this is not the best choice.

      Fidelity has good accounts and good information. Start investing now, and let the power of compounding work for you.

      You can’t just open a 401k. If your employer offers a 401k and you qualify, then you can invest in that 401k. No problem that you can’t do it yet. You can still invest in a Roth. You’ll have full control over the investment and you can invest in almost anything (don’t go nuts here, though). In a 401k, you can only invest in the funds that the 401k offers.

  3. QUESTION:
    Do Solo 401k profit sharing contributions have to be the same percent for each partner in a partnership?
    We have a multi-member LLC (2 people). We want to set up a Solo 401k plan, but each year, we may not want the profit sharing portion of the contributions to be the exact same percentage for each member.

    Let’s say for a particular year, one member would rather have the cash then have it go to a retirement account, but the other wants the full contribution limit in retirement. Can that be done with a Solo 401k? Can it be done with a SEP-IRA?

    • ANSWER:
      unless the 2 people are married you can’t do a solo 401k. But to answer your question…it’s possible to use different profit sharing percentages. Since both are considered highly compensated employees you can discriminate against one or both. And even change back and forth from year to year. You’ll want them in seperate groups with seperate variable contribution rates. Because there will have to be discrimination testing, you’ll want to hire a reputable TPA to administer this plan so it will require a little higher expense but it’s worth it. Tell them that you are interested in a new comparability plan.

  4. QUESTION:
    who can create a solo 401k?
    I’m a temp attorney and work for various employment agencies for short term projects which means i have difficulty qualifying for the 401k plans of the agencies. I have one 401k through one of them but I haven’t gotten a project from that agency for three years.
    1. Am I eligible for a solo 401k?
    2. Will starting one affect my eligibilty for my current 401k?
    3. Will it affect my eligibility for unemployment benefits?
    Thanks
    *A Hunch – thank for the info. I am currently eligible for UI. At least in NY, temps are eligible.

    • ANSWER:
      Two other options:
      Roth account
      Tax-dedutible IRA account.
      ,000 a year
      You can get these throgh brokerages like Schwab or Fidelity. No cost

      Of course, before considering this. Keep that emergency fund in your savings or a cd that you can break. If you temp. I would keep a full 9 months worth of emergency living expenses tucked away in this. Make sure you have this first

  5. QUESTION:
    Sole proprietor making spouse employee; 401k & health benefits?
    I have a sole proprietorship that my wife is involved in. I have not yet paid her, but am now wondering if it is worth making her an employee so she can participate in my solo 401k plan. I would also pay her health insurance as a benefit.

    I am looking for a pro and con analysis or an outline of the tax consequence of this decision.

    Thanks -Brian

    • ANSWER:
      Taxes are kind of a wash, if you reduce your income to pay her the difference. Also this gets your wife credits for social security and medicare. If she has no income, she gets no credits.

      You can deduct your medical insurance on your taxes, but if you provide your wife with full benefits you diedcut the full amount. If you have other employees, or will in the future, you’ll have to offer them the same benefits.

      Depending on your income from the business, you might want to consider a S corp to reduce taxes.

  6. QUESTION:
    Are we eligible for Solo or Individual Roth 401K?
    Hi,
    I have 2 questions.

    My wife and I are realtors. Our income is 100% commissions. We get a 1099 from our broker for our commissions. We file as a sole proprietorship for tax purposes.

    1. As individuals are we eligible to open individual 401k plans with designated Roth contributions?

    1. As a husband and wife can we open 1 individual 401k plan with designated Roth contributions?

    Thank you.
    Kind regards, Mike
    What is not clear to me is if we are eligible given we are 1099 employees and not W2.

    • ANSWER:

  7. QUESTION:
    Individual 401k – Solo 401k – SEP IRA?
    I’ve recently become self employed and have a 401k at my old job. I just started doing research on self employed retirement plans like the SEP IRA and individual 401k. I found some good information about them here http://www.individual401k.com

    From reading information about them the Individual 401k and SEP have the same limits ,000 but with the individual 401k you might be able to contribute more at “identical income levels”. Here is a quote from their website.

    “Compared to other retirement plans you may be able to make greater contributions at identical income levels, therefore maximizing retirement contributions and valuable tax deductions.”

    Has anyone else set one of these retirement plans up? Should I setup a SEP IRA instead of an Individual 401k? What are the main things I should be considering when I make my decision?

    Thank you for any information you can provide about the SEP IRA or Individual 401k to someone who is self employed.
    JT

    • ANSWER:
      JT this is probably what you need to help you. It explains the differences pretty clearly.

      http://www.taxalmanac.org/index.php/SEP_IRA_versus_Solo_401k_/_Individual_401k

      SEP IRA versus Solo 401k / Individual 401k

      Introduction:

      Are you still recommending a SEP IRA as a retirement plan to your self employed clients? I’m guilty of that too until I learned about how some of my clients could benefit from the Individual 401k (sometimes called a Solo 401k) as an alternative to a SEP IRA. A SEP IRA is a good choice for some self employed clients, but in other situations an Individual 401k provides a larger contribution / tax deduction versus a SEP IRA

      About the Topic:

      Individual 401k / Solo 401k plans are available to sole props, LLC and S and C corps. The advantage is in how the contributions are calculated. Also, a client that has an Individual 401k can have a loan, something they can not have in a SEP IRA. For example, I have had a client that left an employer and had a 401k, rolled over their 401k into an Individual 401k and then borrowed ,000 to finance the startup of his business. There are no income or credit qualifications of getting the loan and interest is paid back into their own 401k.

      Contributions SEP IRA versus Individual 401k / Solo 401k

      In the example below the client is age 55 will have 0,000 net income in 2006 as a sole prop.

      SEP IRA – max contribution would be ,587

      Individual 401k – max contribution would be ,000 + ,587 = ,587.

      Before I knew of the benefits of the Individual 401k I would have recommended a SEP IRA and would have left a ,000 tax deduction on the table.

      Not every client can make a contribution greater than the ,587 permitted in a SEP IRA in this example, but for those clients that can an Individual 401k is clearly more advantageous. Also, a very interesting point is the benefits can be doubled for a husband and wife both working for the business and each with 100k net income would be able to contribute a total of ,174 to an Individual 401k.

      Summary:

      An Individual 401k may provide your clients with a greater tax deduction and retirement contribution when compared to a SEP IRA. Also, an Individual 401k allows a loan that can provide a financial cushion or can help finance the startup of the business. I have had clients setup retirement account at this firm and have become knowledgeable about these retirement plans by reading the information on http://www.individual401k.com

  8. QUESTION:
    Individual-401k’s offering Bear (Short) Funds?
    I have some money in an Individual (or “Solo”) 401k plan, and I’m now intent on investing it in one or more Bear Funds.

    My plan (Enterprise Funds) doesn’t offer any Bear Funds.

    I’m therefore seeking any other Indivividual-K providers that do offer short funds (like RYURX, USPIX, POTSX, BEARX, GRZZX, RSCOX, etc.)
    With all due respect to Frank, potential losses can easily be limited with stops. My question isn’t whether I should invest in short funds within my retirement account, but rather, how.

    • ANSWER:
      The 401(k) programs, as well as the various IRA retirement plans were established by law to foster “investment” plans, not what the law makers considered “speculators” plans. Thus the “retirement plans” (almost) always exclude leveraged bull and bear speculations. However, if you have a “solo” or self-directed (roll-over) IRA plan, I believe that certain highly leveraged funds that you mentioned, do offer these types of funds.
      Certainly inquire of each family of those funds.

  9. QUESTION:
    Question about the Solo 401 K Retirement Plan for Self-Employed?
    I have run a consulting business full-time for the past five years. I now want to accept a great opportuntiy to take a full-time job that requires me to shut down my business. In fact, a client wants me to go with them full-time. Can I still maintain my Solo 401 K even after self-employment ends? In other words, can I still access the self-loan component? Can I still rollover the proceeds from my previous 401K into one larger Solo 401 K account after I end self-employment? Those are the two biggest benefits of the Solo 401K that I’d like to continue. Thank you.

    • ANSWER:
      To answer your first question, the solo 401(k) is a qualified plan. The contributions are based on a percentage of self-employment income. If you are no longer earning income as a consultant, no further contributions can be made. You can, however, leave the money in the plan to grow tax-deferred.
      The loan provision is still in effect and you would be able to borrow up to 50% of the balance if it’s less than ,000 (I’m pretty sure about that limit, but you can check with your plan administrator).

      I’m not sure I understand the question about the rollover. You say “previous 401k into one larger Solo 401k” after you end self-employment. I know you would be able to roll your Solo 401(k) into your new 401(k) plan at your previous client’s company. I’m not sure about vice versa since you would technically be “separated from service”.

      Check with your plan administrator for confirmation on all the details. They will be able to answer the questions more in depth.

      Ron, ChFC

  10. QUESTION:
    SEP/401k options for a (unincorporated) 1099 contractor ?
    I am a 1099 contractor and interested in setting up a 401k/SEP account. From my research so far it seems like i can set up a SEP plan and contribute up to 25% of pretax income. I also looked into Solo 401k but it seems like it is only available to incorporated businesses? I would like to contribute more than 25% of my income but as a 1099 contractor do i have any other options?

    And also if i contribute 5k to Roth IRA in the same year, does that mean i can contribute 5k less to SEP or are they both independent of each other and it doesn’t matter either way?

    • ANSWER:
      You may have additional options with a Keogh plan if you cannot qualify for a 401k plan since you are not an incorporated business. Qualified plans are very complex vehicles, and it is best that you consult with an enrolled agent to determine the best plan for your situation. An enrolled agent is a CPA who takes additional training and has received additional certifications in tax law.

      You can, however contribute to both a SEP IRA and a Roth IRA without it affecting your contribution limits. You must be under the maximum income limit to qualify for a Roth IRA, which is 1,000 if you’re single or 9,000 if you’re married filing jointly. Over that amount, your contribution gets phased out.

      If you’re under 50 years old, you can contribute up to ,000 to a Roth IRA (,000 if you’re 50 or older) and contribute the maximum to a SEP-IRA. That is exactly what I do, and I’m also self-employed as a 1099 contractor.

  11. QUESTION:
    Should I go to H&R block with these returns below?
    I am single…26 in a 5 year arm. mortgage. No dependants, but I am renting out my condo which i am paying the mortgage on, also employee stock option plan, 401k plan, 14000 k in interest paid yearly and a few items that i’ve bought for work with my own money?

    Should this go to H&R block, or a personal solo tax accountant ? i would like to get my payment asap.

    thx.
    which is faster to get the return, solo or HR Block?

    • ANSWER:
      Go to H&R Block.

      Your return is not so complicated that it’s worth going to a high-priced specialist. Plus they’ll do it right, you never know with a solo guy.

  12. QUESTION:
    im self employed as a barber. i want a retirement plan.what are my options and who’s the best companies?
    solo 401k, variable life insurance, etc.

    • ANSWER:
      What about an IRA or a roth IRA?

      check this website http://www.fool.com/retirement/index.aspx?source=ifltnvpnv0000001 they have a ton of information about retirement and investing

  13. QUESTION:
    which retirement account best suits me?
    I am a 21 year old day trader trading my own account. At the end of the month I usually withdraw my profits and send them to a savings account. I opened a Roth IRA and plan on contributing the max ,000 per year. I will like to contribute more to my retirement but I am not sure what other account I can open. I do not own a business or work for anyone. I’ve been told to look into a SEP, Keogh, and Solo 401k but don’t know which account is best suited for me. Which is the best type of retirement account that I should open if I am working for myself and not under any business?

    Also, I am currently making less than 0k but if I pass that I wont qualify for the Roth anymore so what do I do then?

    thx!

    • ANSWER:
      The way to expand your retirement account as well as create more deductions for yourself is to form an LLC (limited liability corporation). That way you could have a solo 401k and put in and deduct over k of profits/earnings. You can deduct all kinds of business and health insurance expenses as well.

      LLC also protects you in case you had a bad trade and lost more than you had in the account, such as shorting stock you don’t hold.