Individual 401ks are the ultimate retirement account if you are looking to save the largest amount of money. They provide much of the same profit-sharing advantages as a typical 401k. But, Solo 401k plans provide less complexity and lower costs.
Now, let’s go through what you need to know about an Individual 401k at Midland
An individual 401k is designed for a self employed business owner with no employees. You cannot contribute to an individual 401k plan if you have ANY employees. Business owners or partners are considered owner-employees rather than employees.
The IRS allows one exception to the no-employees rule on the individual 401(k): your spouse, as long as he or she earns income from your business.
These plans can be set up in two different ways: Traditional or Roth
- Traditional 401ks mean that contributions are made pre-tax – similarly to a Traditional IRA – and qualified distributions are taxed as income.
- Roth 401ks are exactly what they seem: contributions are made with after-tax dollars, and qualified distributions are tax free.
All business entity types are eligible for this plan. This includes sole proprietors, partnerships, and corporations.
The Plan Administrator (Midland) and the Trustee (you) of the plan have different responsibilities. Let’s dive into those below.
- Obtain EIN for the Plan
- Report Distributions from the Plan
- File Form 5500 – EZ on behalf of the plan
- Comply with IRS Requirements and ERISA
- Provide plan documents and amendments
The Trustee will:
- Set up a bank account for the plan
- Fund the plan via rollover of contribution
- Set up plan by 12/31 of a given year
- Maintain eligibility
- Keep records of contribution for tax reporting
To open the bank account you will need:
- EIN / Tax ID number
- IRS approved Plan Documents (provided by Midland if desired)
- Summary Plan Description
- Articles of Organization
- Operating Agreement
There are many benefits to having an Individual 401k plan. They include:
- Plan participants can borrow up to 50% of the account balance, up to a maximum of $50,000
- Ability to invest in alternative investments like real estate, hedge funds, cryptocurrency and more
- Higher contribution limits annually compared to an IRA
- Checkbook control of your funds
- Exemption from UBIT and UDFI taxes
When making contributions to an Indy 401k, the accounts splits the contribution up into two entities: the employee and employer. You can make separate contributions as both the employer and the employee.
Employee Salary Deferral: $20,500
Salary Deferral Catch Up Contribution (age 50+): $6,500 or 100% of compensation (whichever is less)
Employer Profit-Sharing Contribution: Up to 25% of salary of self-employed earning
Total Contributions-Salary Deferral plus Profit Sharing Match (under age 50): $61,000
Total Contributions-Salary Deferral plus Profit Sharing Match (age 50+): $68,500
Can I make contributions to both my Individual 401(k) and my IRA for the same tax year?
How do I calculate how much I can contribute to my 401(k)?
I have a full-time day job and max out my 401(k), but I also have self-employment income. Can I also contribute to my individual 401(k) if I am already maxing out my day job 401(k)?
Am I able to contribute post-tax, Roth contributions to my plan, or can I only do this in my IRA?
What is the deadline for me to establish my plan?
Will you generate a 1099-R if I take distributions from the plan?
What if I plan to hire full time employees later?
Can I rollover my other retirement accounts to this 401k plan?
If you are self-employed, have no employees, and want a plan where Midland is here to answer any questions you may have, this may be the plan for you. This is our most popular 401k plan because Midland handles the recordkeeping and administration for your plan, as well as reporting annual distributions to the IRS. This is a great option if you want Midland to help guide you through the ins and outs of your plan and ensure your plan is in compliance with IRS guidelines.