Solo 401k Rules and FAQs

A solo 401k plan, or self employed 401k as it is sometimes called, is designed for independent contractors and the owners of small businesses to hold and develop retirement savings.

It is often thought of as the most desirable retirement investment option as the annual contribution limits are set high and are also tax free. The capital which is deposited can grow tax free until the time the funds are withdrawn upon retirement.

What are the Solo 401k contribution limits?

The 2012 Solo 401k contribution limit is $50,000 or up to $55,500 if age 50+.  2011 Solo 401k contribution limit is $49,000 or $54,500 if age 50+.

Are the Solo 401k contributions mandatory each year?

Solo 401k plan contributions are discretionary and can be increased, decreased or stopped on a year by year basis.

Can Solo Roth 401k contributions be made?

Yes. There is an option to make Solo Roth 401k contributions with the salary deferral portion of the Solo 401k. Contributions into a Solo Roth 401k are not tax deductible, but withdrawals are tax free after age 59 ½. In 2012 Solo Roth 401k contributions can be made up to $17,000 or $22,500 if age 50+.

Can the profit sharing portion of the Solo 401k be made as a Roth (after-tax) contribution?

No. The profit sharing portion of the Solo 401k contribution is not eligible to be made as a Roth contribution. Profit sharing contributions are made pre-tax and are tax deductible.

What is the difference between making Roth 401k (after-tax) and Traditional (pre-tax) contributions to the Solo 401k?

The basic difference between a Roth Solo 401k and a Traditional Solo 401k is that the Roth 401k is funded with after-tax contributions while the Traditional 401k is funded with pre-tax contributions. 

In other words, with a Roth 401k you pay taxes today in return for a tax free withdrawals in retirement. 

Traditional 401k contributions are tax deductible and are made pre-tax so you save taxes today, but withdrawals are taxed in retirement.

Are Solo 401k loans allowed?

Yes. Tax free Solo 401k loans are permitted. Loans up to 1/2 of the total value of the Solo 401k up to a maximum of $50,000 are permitted.  IRS rules do no allow loans with IRAs, SEP IRAs, or Keogh (Money Purchase/Profit Sharing Plans).

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