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
What is an Individual 401k?
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 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
If your plan has an aggregate balance of over $250,000, Form 5500 must be filed. You can either file it on your own or use Midland’s easy filing services.
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
Contribution Rules and Limits
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. For 2023, limits are as follows:
Employee Salary Deferral: $22,500
Salary Deferral Catch Up Contribution (age 50+): $7,500 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): $66,000
Total Contributions-Salary Deferral plus Profit Sharing Match (age 50+): $73,500
Can I make contributions to both my Individual 401(k) and 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:
- For Sole Proprietors, 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.
- For S-Corporations, 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 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)?
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.
What is the deadline for me to establish my plan?
You need to establish your plan by December 31st of the tax year in order for it to be valid for the plan year. You must make employee contributions 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.
Do you have an example of a note?
Midland does not prepare these types of documents.
Can I rollover my other retirement accounts to this 401k plan?
Yes, you are able to rollover other retirement accounts to this plan, with the exception of Roth IRA accounts. Roth IRAs cannot be rolled over into a Roth 401k.
Open an Account
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.