The Solo 401k Plan: Are There Rules and Regulations I Should Know First?

Have you ever wondered how a Solo 401k plan works and what makes it different from the more traditional 401(k) plan?

Solo 401k plan is a plan that is designed for business owners that don’t have any other employees, besides themselves and their spouse. It’s not a new plan; in fact it is basically a traditional 401(k) plan covering only one person (and their spouse).

The Solo 401k plan follows the same rules and regulations as any other types of 401(k) plans. However, the Solo 401k plan grew in popularity as a result of the EGTRRA tax law change that went into effect in 2002. The law made changes to the way salary deferred contributions are treated when calculating the maximum deduction limits for contributions to a 401(k) plan. The change was beneficial in that it afforded some people the opportunity to invest increased amounts of money towards their retirement.

Self-Directed Solo 401k (also known as Individual K) is the ultimate qualified retirement plan for people who work for themselves without any full-time employees, other than their spouse – in any capacity or structure (e.g. corporation, sole proprietor, LLC, partnership, independent contractor, etc.). Solo 401k Plans allow a small business owner or self-employed individual the capability to use his or her retirement savings to invest into virtually limitless investment opportunities such as real estate, tax liens and tax deeds, businesses, precious metals, and more on their own without requiring custodian approval on a tax-free basis!

Although, Solo 401k plans can engage in most types of investments, not all investments are allowed. There are some transactions that are considered “prohibited transactions” and can raise red flags that could lead to the Solo 401k being disqualified along with sever tax consequences.

Therefore, it is recommended that you, as the investor, familiarize yourself with the Solo 401k prohibited transaction rules.  If you’re not sure how to invest in a Solo 401k plan properly, it is best to consult with the professionals at Sense Financial Services for further assistance.

  • IRC Section 4975 – Section 4975 – Tax On Prohibited Transactions
  • IRC Section 512 – Internal Revenue Code Provision which describes Unrelated Business Taxable Income
  • IRC Section 511 – Internal Revenue Code Provision imposing tax on Unrelated Business Income
  • IRC Section 513 – Internal Revenue Code Provision provision describing an unrelated trade or business
  • IRC Section 401 – Primary Internal Revenue Code provision relating to the 401(k) Plan

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