Solo 401(k) Plans

Osborne & Associates, Inc. is a diversified, full-service employee benefit consulting organization that stands apart from others in our field due to rigid adherence to our corporate philosophy:

If you are self-employed, rule changes contained in the 2001 tax bill may make a one-person 401(k) plan a viable alternative, as compared to other retirement plans, for small businesses. The solo 401(k) plan is suitable for any business owner who has no employees other than co-owners or spouses. You may work as an independent contractor with 1099 income, freelancer, sole proprietor, or in a partnership, Limited Liability Company (LLC), or corporation.

Small business owners can establish an individual 401k and transfer their IRA, 401k, 403b, or other qualified retirement funds into the new individual plan.

The principal reason you might want to consider a one-person 401(k) plan is it may offer higher contribution limits versus other retirement plans available for small businesses. In this regard, the two most significant changes contained in the 2001 tax bill with respect to retirement plans are:

1) Raising the total contribution limit, including employer profit sharing and/or matching contributions, to the lesser of $53,000 (for 2015) or 100% of income.
2) The employer contributions to the plan may not exceed 25% of total payroll. The important issue here is employee contributions are excluded from this limit.

The individual 401(k) plan includes the provision to allow age-50 catch-up contributions, provided you meet the regulation requirements.

Example: If you earn up to $212,000 you can attain the maximum contribution for the 2015 plan year ($212,000 x 25% = $53,000) by making employer contributions only. If you earn less than $212,000 you can contribute 25% of your income as the “employer”, plus up to $18,000 (the maximum employee contribution) to reach the $53,000 limit. A person 50 or older could contribute an additional $6,000 catch-up contribution, for a total of $59,000 in 2015.

2015 Solo 401(k) Plan Sample

Name Salary 401(k) Catch Up 25% Profit Sharing Total Contribution
(under 50)
$50,000 $18,000 $0.00 $12,500 $30,500
  100,000 18,000 0.00 25,000 43,000
  212,000 0.00 0.00 53,000 53,000
  212,000 18,000 0.00 35,000 53,000
(over 50)
$50,000  $18,000 $6,000 $12,500 $36,500
  100,000 18,000 6,000 25,000 49,000
  212,000 0.00 6,000 53,000 59,000
  212,000 18,000 6,000 35,000 59,000