Solopreneurs

Maximize Your Retirement Contributions as a Solopreneur

by
Bob Mason
on
10/12/2016
Maximize Your Retirement Contributions as a Solopreneur

There are plenty of small business owners who are really sole proprietors: they are either running their business entirely on their own, or it's just them and their spouse. If this describes you and you are concerned about funding your retirement, then you may be interested in learning more about the Solo 401(k). This is a special kind of retirement plan that offers some significant benefits, including:

  • The ability to administer your account on your own, without the intervention of middlemen. No need to leave its management to a broker, bank or trust company.
  • The ability to put larger amounts of cash into the account: the funds limits are roughly equal to a combination of the profit sharing and the 401(k) amounts.
  • Though some self-directed IRA transactions incur unrelated business income tax (UBIT), that is not the case with a Solo 401(k)
  • While Adjusted Gross Income limitations apply to regular Roth contributions, that is not the case when making them into the 401(k) part of the Solo 401(k) plan.
  • The ability to move your existing retirement funds over into the plan.
  • The ability to make your own investment choices, including investing in private companies, precious metals, real estate, foreign assets and more, without restrictions.

Contributions to the Solo 401(k)

When you make a contribution to a Solo 401(k), it is divided into two distinct components. The first is a profit-sharing contribution, which is allowed to represent up to 25% of W-2 income if your business is incorporated or 20% of net self-employment income for businesses that are unincorporated. The second is the same as a traditional 401(k) – a salary deferral contribution that can be as much as 100% of the first $18,000 of the compensation that is left over after the portion that has been put into the profit sharing component. For those who are over the age of 50, the $18,000 threshold increases to $24,000. Contributions to this second component are tax deductible. The 2016 limit for how much a sole proprietor can put into a Solo 401(k) is $53,000, and cannot be more than their total compensation. 

Discretionary Funding

People who set up a Solo 401(k) have no requirements regarding funding it — it is entirely discretionary. Sole proprietors can choose to raise or lower the amount that they contribute each year as long as their contribution remains within the limits. They are also permitted to completely forego making a contribution if they choose.

Where Deducted

When you set up a Solo 401(k), where your contribution comes from is dependent upon how your business is organized. If you are running your business as a partnership, a sole proprietorship, or as an LLC taxed as a sole proprietorship, then it is deducted from personal income rather than as a business expense. The taxpayer would report it as an adjustment to gross income using page 1 of Form 1040. 

If you are running your business as a C corporation, an LLC electing to be taxed as a corporation or as a Subchapter S, then the profit sharing portion would be deducted as a business expense while the salary deferral contribution is deducted from your W-2 earning because you are classified as the business' employee.

Deadlines

If you are interested in setting up a Solo 401(k) for your business and you are set up as a sole proprietorship, you need to set it up by December 31st. For corporations, the deadline is the end of your fiscal year. Contributions must be made by the regular tax filing deadline in April (or any applicable extension) if you are unincorporated, but for businesses that are incorporated the contribution deadline follows the end of your fiscal year by 15 days.

Roth Options

Where your specific plan document allows it, Solo 401(k)s also provide the opportunity to set up the 401(k) portion as a non-deductible qualified Roth IRA contribution. Solo 401(k) plans can offer significant advantages.

It is best to work with a professional to best plan for your future.

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Bob Mason

Bob Mason

Bob Mason is the founder of Coast Financial Services Inc. servicing both the Santa Cruz, and San Jose areas. Bob Mason is a skilled financial professional who is fully equipped to assist any of your accounting needs. Founding his firm in Santa Cruz, Bob understands the importance of small businesses and how they form the backbone of the area. Coast Financial Services, Inc. has been dedicated to the growth and profitability of businesses in Santa Cruz for 17 years. To learn more about Bob Mason and the rest of his team, visit their website.

COAST FINANCIAL SERVICES, INC.
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