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You are here: Home / 401K / Kelly Bullis: Solo 401(k) retirement plan

Kelly Bullis: Solo 401(k) retirement plan

August 7, 2021 by Retirement

Kelly Bullis

By Kelly J. Bullis

Saturday, August 7, 2021

Are you self-employed with no other employees? Are you making a lot of money and do not need it all? Are you getting older and wondering how you will be able to retire someday? There are many retirement plan options out there, the simplest is a basic IRA. BUT, if you want to put a LOT away, a “Solo 401(k)” may be just the ticket for you.
Since you are the only employee, you can make the “employee” and “employer” contributions. With standard Defined Contribution Plans, such as a Simplified Employee Pension (SEP) or the other basic profit-sharing plans, the employer’s deductible contribution in 2021 is capped at the lesser of 25% of compensation or $58,000.
The maximum compensation that may be considered for the Defined Benefit plan is $290,000.
A “Solo 401(k)” offers greater contribution limits for all but the Defined Benefit plan. For 2021, all plans except the Defined Benefit plan, you may defer up to $19,500, plus an extra catch-up contribution of $6,500 if you are age 50 or older. But here’s where it gets really good. Elective deferrals to a “Solo 401(k)” do not count toward the 25% cap. So, you can combine an employer contribution with an employee deferral for greater savings.
Here is an example that will bring this crystal clear to you. Let’s say you’re under 50 and you receive the annual wage of $125,000. The maximum deductible amount you may contribute to a SEP is $31,250 (25% of $31,250.) But now you can defer $19,500 to the account in addition to keeping the maximum $31,250 employer contribution. That gives you a total contribution of $50,750.
Remember, these contributions grow tax deferred. So, if you put $50,750 away every year for 20 years, assuming an average annual earning rate of 7%, you would have $2,226,158 saved up. If you did a regular SEP contribution of only $31,250 for 20 years at the same 7% earnings rate, you would have $1,281,109. That is $944,849 less!
Now there are a couple of caveats. If your business is NOT incorporated, the 25%-of-compensation cap is reduced to 20%.
All contributions are voluntary so you could change or even eliminate contributions if your business has a bad year profit wise.
If you hire other employees, you will have to add them to the plan and then the employer contributions are not all going to you any longer.
Finally, there is an annual cost to have a plan, and some paperwork to file every year as well.
Did you hear? Gen 41:48a says, “He gathered up all the food of the seven years which were in the land of Egypt, and laid up the food in the cities.”
Kelly Bullis is a Certified Public Accountant in Carson City. Contact him at 882-4459. On the web at BullisAndCo.com. Also on Facebook.

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