A solo 401(k) plan is also known as a self-employed 401(k), an individual 401(k), a single-participant 401(k), and a uni-k, in addition to going by a variety of other names. This type of plan may be ideal for a sole proprietorship or partnership with no employees other than the owners who desire to make significant retirement plan contributions. Answers to some basic FAQs on establishing a solo 401(k) plan are provided below:
Can I Establish a Solo 401(k) Plan?
Should I Establish a Solo 401(k) Plan?
What Features Should I Include in My Solo 401(k) Plan?
How Should Plan Assets Be Invested?
How Do I Choose a Solo 401(k) Service Provider?
Generally, a sole proprietorship with no employees other than the owner and spouse (no common-law employees) can establish a solo 401(k) plan. Although a solo 401(k) can be used in other situations (e.g., a partnership with no non-partner employees), it is usually adopted by a sole proprietorship. The employer must consider any involvement with other companies (e.g., controlled group situations or affiliated service arrangements) before adopting a solo 401(k) plan..
Solo 401(k) plans are feasible when large contributions under a defined contribution pension plan are desired. However, if the maximum contribution an owner or spouse desires to contribute is around $15,000 or less (the exact amount depends upon their compensation and age), a Simple IRA plan-not to be confused with a regular IRA-may suffice. If the owner receives compensation approaching $150,000 or more, a solo 401(k) may not be needed, since another type of defined contribution plan, such as an SEP, may permit similarly large contributions. When establishing a solo 401(k) program, the owner must also consider any issues that may arise regarding reasonable spousal compensation as well as the possibility that any common-law employees will be hired in the future.
A key provision is the solo 401(k) plan's eligibility requirements. If there is no waiting period for eligibility, the hiring of a common-law employee in the future will cause immediate difficulties. A one-year waiting period may be advisable, especially if the owner already has satisfied this requirement. A loan provision may be important, depending upon the owner's anticipated needs.
Plan assets should be invested within the context of the owner's overall financial plan. Mutual funds and/or individual stocks are frequently chosen. If mutual funds are selected, the employer must decide on whether he/she prefers a single fund family or funds from different fund families. Certain investments are prohibited; for example, any investment that involves self-dealing. Investment fees should be thoroughly evaluated; special scrutiny should be given to a provider that claims to offer a low-cost solo 401(k) plan.
Some 401(k) solo service providers provide minimal services in designing and administering the plan. Some provide a bundled product and restrict the investment of plan assets to those for which they receive some compensation. The employer must decide whether he wants to design and administer the plan on his own, with limited assistance from a service provider, by using an outside consultant or Third Party Administrator or a combination of the above.
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