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Solo 401k Plan Owners Need to Be Aware of Three Important Events

By Dmitriy Fomichenko, President and Founder of Sense Financial


A Solo 401k, or an individual 401k, is a small business retirement plan designed for business owners and their spouses. As a simplified plan, the Solo 401k is simple to manage. It does not require a custodian or a TPA, the plan owner can perform administrative role. This plan owner has the ability to direct his or her own retirement plan. This flexibility, however, also comes with certain responsibilities.

Solo 401k PlansAs the plan trustee of a Solo 401k, you are responsible to keep the plan in compliance with the IRS regulations. Usually, the task of a Solo 401k plan trustee can be quite simple. However, there are certain events that demand some actions. As the plan owner, you will need to stay on top of three events.

When the Plan Value Exceeds $250,000

The Solo 401k plan requires little administrative effort from the plan owner, mainly bookkeeping work. When it comes to tax filing, often there is no annual filing requirement for a Solo 401k plan. This will change, however, if your plan value exceeds $250,000 at any time during the tax year.

When your plan value hits this benchmark, you will have to file informational tax return for your Solo 401k plan. The return must be filed with the IRS by the end of 7th month following the end of the plan calendar year (usually by July 31st). The tax filing process is simple and needs to be done by utilizing Form 5500-EZ to the IRS.

When Your Business Expands

The Solo 401k is designed for self-employed individuals and their spouses or partners. Only businesses without any full time employees are qualified for the plan. It is ok for a sponsoring business to have part time employees who work less than 1000 hours a year each.

If your business hires a full time employee, you will no longer meet the eligibility requirement for a Solo 401k plan. This means changes need to be made.

When your business hires a full time employee (other than you and your spouse) you have the option of keeping the plan by making it "frozen." This means you can leave the Solo 401k open, but you can no longer contribute to the plan. Alternatively, you can also choose to rollover the funds to another retirement plan and close the Solo 401k plan completely.

If you choose to close the Solo 401k plan, you will also need to report this to the IRS by filing the final 5500-EZ form.

When You Reach 70½ Years Old

Like other qualified retirement plan, there is a required minimum distribution for a Solo 401k. This required distribution starts when the plan participant reaches 70½ years old. Even if you choose to work beyond this age, you will still be required to start withdrawing at least the minimum amount from your Solo 401k.

The required minimum distribution is calculated based on your estimated lifespan. As the plan owner, you are responsible to take out at least the minimum amount and pay taxes on the withdrawals.

Note that this minimum distribution is also required for a Roth Solo 401k account. However, since Roth contributions are after-tax, there will be no other tax on distributions from a Roth account.

Dmitriy Fomichenko is President and Founder of Sense Financial, a leading provider of retirement accounts with "Checkbook Control": the Solo 401k and the Checkbook IRA. To learn more about the Solo 401k plan, please visit sensefinancial.com or email us at info@sensefinancial.com.


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