The benefits of self-employment are many, but there is at least one significant disadvantage: the absence of an employer-sponsored pension plan, such as 401 (k).
Enter the Solo 401 (k) designed for freelancers, this account mimics most of the features of an employer-sponsored plan, without the trouble of working for a man.
SOLO 401 (k) is usually the most attractive plan for investors if they qualify because they combine SEP and SIMPLE elements. The SOLO 401 (k) is designed only for businesses and spouses only for homeowners. These may be incorporated or unincorporated companies, individual companies, corporations, and corporations.
Solo 401 (k) is for incorporated or unincorporated corporations, partnerships, sole proprietorship, and corporations. The only qualification for contributions to this plan is that a person receives a salary.
The corporation must not have additional employees, except the spouse of the owner or, in the case of business; the solo employees must be independent partners and their spouses. A 401 (k) plan should be the sole contract managed by the company that is not part of a group controlled by federal tax legislation.
The deadline for setting up a Solo 401 (k) plan is the last day of your business year (December 31st of the calendar year). However, if a business is created, people may want to establish a Solo 401 (k) plan at the beginning of the year so that employee salaries are calculated based on W-2 income during the year. This is necessary because the remuneration paid by your own company cannot be deferred until the 401 (k) individual plan is established.
The total individual contribution limit of Solo 401 (k) is set at USD 56,000 in 2019. An additional contribution of USD 6,000 is available to people over 50 years of age.
To understand Solo 401 (k) rules, you need to consider two people: an employer (yourself) and an employee (yes, too). Within this $ 56,000 general contribution limit, your contributions are subject to additional restrictions for each role:
If reserved, the 401 (k) limits apply to each person, not the plan. This means that if you also participate in 401 (k) in your daily work, the restrictions apply to contributions made in all plans and not in each plan.
The good thing about a Solo 401 (k) is that you can only choose your tax benefit: you can opt for the regular 401 (k), in which contributions reduce your income in the year they are paid. In this case, pension distributions will be taxed as ordinary income.
The alternative is the unique 401 (k) Roth, which does not offer an initial tax exemption, but allows you to make distributions with tax-free withdrawal. Generally, a Roth is a great option if you anticipate your income to be massive in retirement. If you believe that your income will go down when you retire, opt for a traditional 401 (k) tax exemption today.
Because of these tax benefits, the IRS has stringent rules about when you can take advantage of money deposited on any account: with a few exceptions, you pay taxes and penalties for any distribution before the age of 59 years and a half.
The IRS provides an exception to the Solo 401 (k) rule: your spouse if she/he derives income from your own business.
This can double the amount you can contribute as a family, depending on your income. Your spouse will make voluntary dismissals as an employee, up to a maximum of $ 19,000 (plus provisions to recover at least 50 years, if applicable). As an employer, you can make a contribution to share the benefits of the spousal plan, up to 25% of the allowance.
You can open Solo 401 (k) at most online brokers, although an Employer Identification Number is required. The broker will provide you with a plan adoption agreement and an account request. When finished, you can configure contributions. You will have access to many investments offered by your broker, including mutual funds, index funds, exchange-traded funds, stocks, and individual securities.
If you wish to contribute for this year, you must define the plan no later than December 31st and pay the contributions of your employees at the end of the calendar year. As a general rule, it is possible to contribute to the employer's profits until the expiry of the declaration.
Remember that once the plan is balanced, additional documents may be required: the IRS requests an annual report on Form 5500-SF if the 401 (k) plans have an asset of at least $ 250,000 at the end of the year nowadays.
John Pournaras Agency