INDIVIDUAL 401(K) PLAN
Individual 401ks, also known as Solo 401ks, are the ultimate retirement plan if you are looking to save the maximum amount of money for retirement. Individual 401ks provide much of the same profit-sharing advantages as a typical 401k, with less complexity and lower costs.
*INCLUDED: A brokerage account for the traditional portion of your assets is included with your plan so you have the freedom to diversify the way you want.
Who is eligible for an individual(k)?
To be eligible to benefit from the individual(k) plan, investors must meet only two requirements:
You must be self-employed and generate income from your business in order to make contributions to the plan. All business entity types are eligible for his plan (sole proprietors, partnership, or corporation).
In order to be eligible for the plan, your business cannot have employees, other than yourself or your spouse. The business owners or partners are considered owner employees’ rather than just employees. Certain employees are excluded from coverage in the plan: Employees under 21, employees that work less than 1,000 annual, union employees, and non-resident alien employees.
Frequently Asked Questions
Can I make contributions to both my Individual 401(k), as well as my IRA for the same tax year?
Yes, you can contribute to both your Individual 401(k), as well as your IRA for the same tax year. However, it is likely that your contributions may not be fully tax deductible for your IRA since you are already receiving tax benefits for contributing to the Individual 401(k). You will need to speak with a CPA or tax professional to determine deductibility.
How do I calculate how much I can contribute to my 401(k)?
The calculation for your contribution will depend on your business’ entity type:
- If you are a Sole Proprietor, the starting figure for calculating your eligible contribution is line 31 of Schedule C.
- If your entity is a C-Corporation, the starting figure for calculating your eligible contribution is W-2 income.
- If the entity type is an S-Corporation, the starting figure for calculating your eligible contribution is W-2 income.
- If the entity type is a Partnership, the starting figure for calculating your eligible contribution is Schedule K of Form 1065 line 14.
I earn a small amount of self-employment income but expect that amount to increase in the coming years. If I don’t know my income when should I contribute?
If you wait until you know your total income figure for the year before making your Individual 401(k) contribution, you will be able to calculate the maximum contribution based on your eligible income and business entity type. Contribution rules allow the participant to wait until his/her business tax return due date + extensions to make 401(k) contributions for the employer profit-sharing match. Employee contributions must be made by the end of the calendar year.
I have a full-time day job and max out my 401k, but I also have self-employment income. Can I also contribute to my Individual 401k if I am already maxing out my day job 401k?
Employee deferral contributions are capped for 2020 at $19,500 (plus $6,500 if age 50+) between all 401k plans. If you’ve already maxed out your day job 401k, you can’t make additional employee contributions to your Individual 401k plan. Even though employee deferrals are maxed, you can still contribute to the profit sharing contribution as the employer to your Individual 401k. One thing to note is the employer profit sharing contributions are not aggregated between all plans, so even if your employer has maxed out the profit sharing contributions to your day job, you can still max out the profit sharing contribution to your Individual 401k plan.
Am I able to contribute post-tax, Roth contributions to my plan or can I only do this in my IRA?
Yes. The employee deferral contribution of an Individual 401k can be Roth, which means that for 2020 you are allowed to contribute $19,500 per year. If you’re 50 or older, you can make up to $26,000 in contributions.
What is the deadline for me to establish my plan?
Your plan needs to be established by December 31st of the tax year in order for it to be valid for the plan year. Employee contributions must be made by December 31st of the tax year, but you have until the tax filing deadline, including extensions for the employer match/profit sharing contribution.
Will you generate a 1099-R if I take distributions from the plan?
Yes. Midland will handle reporting any distributions taken from the plan and will send you a 1099-R form at the end of January each year.
What protections does my plan have should I file for bankruptcy? I’ve heard that 401(k)s have unlimited bankruptcy protection, is that true?
Individual 401(k)s have creditor protection under federal bankruptcy laws. For non-bankruptcy creditors, the protection lies at the state level. Because Individual 401(k) plans are not covered under ERISA, they are generally protected under state laws, with some exceptions.
I am over 72 and my business is still making money, am I allowed to fund my 401k?
Yes, you can still make contributions past 72 as long as you continue to have earned income, however, you will still be required to take Required Minimum Distributions (RMDs) from the plan.
What happens when I want to close my 401k? Can I move my assets to an IRA account? Are there any penalties for changing my account type?
The IRS has specific rules you must follow when terminating a retirement plan. If there comes a point when you are no longer self-employed or decide you no longer want to continue the plan, you may transfer the funds to an IRA account. When the funds are moved to an IRA, Midland will prepare IRS form 1099-R and Form 5500-EZ and will formally close the plan with the IRS.
What happens to my plan if I hire full-time employees?
The Midland Individual 401k plan is not designed for employees. It is the best retirement plan for self-employed individuals. The plan can accommodate an individual and their spouse if they are owners or partners in a general partnership. If you intend to have employees, please call Midland to discuss other options at (239) 333-1032.
Does UDFI (Unrelated Debt-Financed Income) apply to Individual 401ks?
No. UDFI tax applies to the leveraged portion of an IRA investment when the asset is sold, proportionate to the debt on the property. However, UDFI does not apply to 401ks, so this is an additional benefit for using a 401k vs. an IRA plan whose asset is financed with non-recourse debt (exemption exists for 401ks but not IRAs under Internal Revenue Code Section 514(c)(9)).
Can I Own a Business in My Midland 401k?
Midland does not facilitate owning a business in your Individual 401k plan. While this can be done in unique circumstances, it has not won the favor of the IRS. These plans are typically called BORSA Plans and require a specialist to help develop these plans. Operating a business is discouraged in a retirement plan.