Most of us spend our entire lives working hard so that we may someday enjoy retirement. As a self-employed or small business owner you make it a priority to ensure your business is successful, but are you also taking the steps needed to help make your retirement years equally successful? A Solo 401(k) may be just the right retirement plan to help you achieve retirement success.

The Solo 401(k) is a result of changes brought about by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). Prior to EGTRRA, small plans such as SEP IRA’s and SIMPLE IRA’s were the only options available to small businesses. While those plans are beneficial, the Solo 401(k) allows business owners to put away more money than any other retirement plan and benefit from favorable tax saving options.

To help you decide if the Solo 401(k) is the right choice for your business, below are some frequently asked questions.

What is a Solo 401(k) Plan?

A Solo 401(k) Plan, also known as a Self-Employed 401(k) Plan, is a tax-deferred retirement plan designed for self-employed business owners and their spouses. What separates this plan from other self-employed retirement plans, such as a SEP IRA, is that the Solo 401(k) Plan allows you to maximize your savings and tax deduction potential.

Who is eligible to for a Solo 401(k) Plan?

The Solo 401(k) Plan is designed to cover only self-employed and small business owners and their spouses. Any type of business entity including sole proprietorships, partnerships, corporations, and limited liability companies are eligible to establish a Solo 401(k) Plan.

What if my business has employees other than my spouse?

As long as the other employees each work less than 1000 hours per year, are under the age of 21, or are part of a legally excludible group of employees such as non-resident aliens, or independently contracted employees, then the business is still eligible for a Solo 401(k) Plan.

How much can I contribute to a Solo 401(k) Plan?

As an employee you can defer 100% of your salary up to the 2010 maximum contribution limit of $16,500 or $22,000 if age 50 or older. As the employer you can elect to make an employer contribution equal to 25% of W-2 income (20% of earned income if unincorporated) up to an aggregated maximum contribution limit per person of $49,000 or $54,500 if age 50 or older. Generally 100% of salary deferrals and employer contributions are tax deductible.

Are Roth contributions permitted in a Solo 401(k) Plan?

Yes. You have the flexibility to defer Roth or after-tax contributions, or any combination of the two.

Do I have access to my retirement savings prior to reaching retirement?

Yes. The Solo 401(k) Plan offers easy access to your savings through hardship withdrawals and tax free, penalty free loans. Distributions are also available once a triggering event occurs such as death, disability, attainment of age 59.5, retirement, or termination.
Can other retirement plans be rolled over into a Solo 401(k) Plan?
Yes. The Solo 401(k) Plan allows you the ability to rollover and manage all your assets from one convenient account. Rollovers are accepted from IRAs, 401(k) Plans, SEP IRAs, Money Purchase Plans, Profit Sharing Plans, Defined Benefit Plans, SIMPLE IRA Plans, 403(b) Plans, and Governmental 457(b) Plans.

What if I hire full time employees or current employees eventually meet the eligibility requirements to participate in the Plan?

If you think, at some point, you may hire a full time employee other than your spouse or have employees that could potentially meet the Plan’s eligibility requirements then a Solo 401(k) Plan may not be for you. However, in the event one of these situations did occur, the Solo 401(k) Plan would transition to the rules of a traditional 401(k) Plan and the employer would be responsible for paying the additional costs associated with establishing a traditional 401(k) Plan.

What if I am part of a partnership, does my partner have to participate in the same Plan?

Each partner (even in a husband/wife partnership) is able to sponsor their own Solo 401(k) Plan for themselves and their spouses.

Am I able to participate in or sponsor other employer plans while sponsoring a Solo 401(k)?

A business owner cannot sponsor any other type of retirement plan if participating in a Solo 401(k) Plan. However, if the owner is also employed by another business that offers an employer sponsored retirement plan, they can participate in that plan as well but because contribution limits are aggregated it would decrease the amount that could be contributed to the Solo 401(k) Plan.

What are the administrative responsibilities of the Plan?

The plan administrator (usually the business owner) is primarily responsible for making sure all contributions and loan payments (if applicable) are made timely. The Solo 401(k) Plan is not subject to annual testing requirements, the same reporting, or recordkeeping requirements typically associated with other employer sponsored retirement plans. The annual form 5500 filing is not required until the Plan balance exceeds $250,000.

What investment options are available?

There is a full range of investment options to choose from. Canandaigua National Bank and Trust’s open architecture allows you to select investments that are designed to meet your retirement goals, risk tolerance, and time horizon. In addition, we offer experienced retirement specialists who will help you develop and manage your portfolio.

Where can I get more information on a establishing a Solo 401(k) Plan?

Canandaigua National Bank and Trust’s experienced, non-commissioned retirement services team is available to personally discuss your retirement options and determine if a Solo 401(k) Plan is the right choice for you and your business. For more information, contact us at 585-419-0670.