- The annual contribution limits are $16,500 plus a $5,500 catch-up contribution if you are 50 or over anytime in 2010.
- You can combine this with a profit sharing plan and contribute up to an additional 20% of your net self-employment income or 25% of your salaried compensation to a combined maximum of $49,000 ($54,500 if 50 or over).
- Roth Solo 401(k) plans are also allowed.
- Contributions are discretionary; the amount can vary (up to the maximums) each year or may be omitted altogether if your cash flow drops.
- Loans are available from Solo 401(k)s, this is not the case with a SEP for example.
- If you are considering a Roth IRA conversion, the Solo 401(k) will not factor into the tax and cost calculation as will a SEP-IRA.
Solo 401(k) plans can be opened at custodians such as Charles Schwab, Fidelity, Vanguard, T. Rowe Price, and others. At most levels of income, the Solo 401(k)/profit sharing combination allows for higher contributions than does a SEP IRA. The 401(k) can be a better option than the SEP if your business income or compensation drops but you still have the means to make sizable contributions. Depending upon the plan document, you may be able to contribute up to 100% of your income/compensation. On downside, once the balance in your account tops $250,000 the level of annual government paperwork increases a bit.
Sole proprietors, partners, and their spouses are eligible to participate. Corporations and LLCs can also utilize the Solo 401(k). Once a business hires additional employees this type of plan will generally not work.
The deadline to open the 401(k) is the end of the calendar year. Your contributions must be made by the time your 2010 tax return is filed, including extensions.
Talk with your financial or tax advisor to see if a Solo 401(k) is right for your situation. Feel free to contact me with any questions as well.