Partnership Solo 401k Options for Business Owners

As a business owner, you have various retirement plan options to choose from, but a Partnership Solo 401k is a popular choice for many entrepreneurs. This plan allows business owners to save for retirement while also enjoying tax benefits.

One of the key benefits of a Partnership Solo 401k is that it offers high contribution limits, with a maximum of $57,000 in 2022. This can help business owners save a significant amount for retirement.

Business owners can also use a Partnership Solo 401k to save for retirement and enjoy tax deductions on contributions, which can be a major advantage. By contributing to a Partnership Solo 401k, business owners can reduce their taxable income and lower their tax liability.

Business owners who are self-employed or have a small business may find a Partnership Solo 401k to be a more cost-effective option compared to a traditional employer-sponsored plan.

As a partner in a solo 401(k) plan, it's essential to understand the contribution limits and rules. Your total contributions may not exceed $57,000 in 2020 if you're under 50 years old.

The IRS limits employee contributions to 100% of your compensation, up to $19,500 in 2020. If you're 50 or older, you can also make catch-up contributions of $6,500, totaling $26,000 in elective deferrals.

As an employer, you can make profit sharing contributions up to 25% of your compensation for eligible employees. However, if you have no employees, you can make profit sharing contributions for yourself only, up to the IRS limits.

Profit sharing contributions for sole proprietors and single member LLCs are limited to 20% of earned income, subject to self-employment tax. This is because sole props and single member LLCs are entitled to deduct half of their total self-employment tax.

Here's a summary of the contribution limits:

Remember, these limits apply to all 401(k) plans you participate in, not just your solo 401(k) plan.

As a business owner, you're entitled to make profit sharing contributions to your solo 401(k) plan. This is where the structure of a solo 401(k) plan comes in handy.

If you have eligible employees, profit sharing contributions must be made to all participants, based on age/tenure/comp/etc. as specified in your plan document. With no employees, you're free to make profit sharing contributions for yourself only.

The IRS limits profit sharing contributions to 25% of your compensation for S-Corporations, C-Corporations, Partnerships, and Multi-member LLCs. This means you can contribute a significant portion of your business income to your solo 401(k) plan.

But, if you're a sole proprietor or single member LLC owner, the calculation is slightly more complex. The IRS states that employer contributions are limited to 25% of the business owner's income that's subject to self-employment tax.

To make it easier, the IRS provides a step-by-step worksheet for this calculation in publication 560. Alternatively, you can use a calculator like Bankrate.com to help with the math.

The calculation works out to about 20% of earned income instead of 25% for sole proprietors and single member LLC owners. This is an important distinction to keep in mind when planning your solo 401(k) contributions.

Here's a summary of the profit sharing contribution limits:

Keep in mind that your total contributions in 2020 may not exceed $57,000 if you're under 50 years old. If you've reached 50, your aggregate limit rises to $63,500 with the $6,500 of catch up contributions.

As a business owner, choosing the right structure can significantly impact your solo 401(k) contributions. Stephanie, a sole proprietor, can make a profit sharing contribution of 25% of her adjusted earned income, which works out to $23,233.

Kyle, on the other hand, can still defer $19,500 as an employee and $6,500 as a catch up contribution, but his profit sharing contribution is based on K-1 income attributable to self-employment earnings, resulting in a total contribution limit of $42,250.

Whether you're a sole proprietor or a multi-member LLC, understanding your business structure and options is crucial for maximizing your solo 401(k) contributions.

Having no eligible employees is a common scenario for solo 401k plans.

This means you can continue contributing to the plan without worrying about meeting certain eligibility requirements.

Just like traditional 401k plans, solo 401k's require a plan document that outlines how the plan operates, including eligibility requirements.

If you don't have any employees who meet the eligibility requirements in your plan document, you're good to go.

Employees must become eligible if they work 1,000 or more hours per year, are at least 21 years old, and have at least one year of service.

Plan documents may also exclude certain union employees and nonresident aliens.

You have some flexibility to structure your plan to be more generous than these requirements.

For example, you could structure a plan with an hours requirement of 500, an age requirement of 18, and tenure requirement of six months.

Just remember, your plan document governs all, so whatever you choose, you must stick to it.

As a business owner, you have the flexibility to choose from various structures, and understanding the implications is crucial for your financial future.

If you're a partnership or multi-member LLC, you can still make employee deferrals, but the profit sharing contribution limit is based on the K-1 income attributable to self-employment earnings.

Kyle, who converted his business from an S-corp to a multi-member LLC, earned $65,000 and could defer $19,500 as an employee and $6,500 as a catch-up contribution.

His total contribution limit would be $19,500 + $6,500 + $16,250 ($65,000 * 25%), which equals $42,250.

In this scenario, Kyle's profit sharing contribution is limited to 25% of his K-1 income, which is $16,250.

Employee and Spouse Contributions can be a game-changer for your retirement savings. As the business owner and sponsor of your solo 401(k) plan, you're entitled to defer up to $19,500 of your compensation to the plan in 2020.

If you're 50 or older, you can also make catch-up contributions of $6,500, totaling $26,000 in elective deferrals. This is a great way to boost your retirement savings quickly.

Your spouse can also contribute to the plan, up to the annual limits, if they wish. This can be extremely convenient, especially if you're looking to boost your household contribution limit.

Your spouse can be an employee of your solo 401(k) plan, which can be a game-changer for your household finances. This exception is allowed by the IRS and DOL.

As long as your spouse is your only employee, you can continue using a solo 401(k) without jeopardizing your plan's status. This means you can still contribute to the plan, and your spouse can too, up to the annual limits.

Your spouse can contribute to the plan as your employee, up to the employee contribution limit (plus the 50-and-older catch-up provision, if applicable). This could effectively double the amount you can contribute as a family.

As the employer, you can then make the plan's profit-sharing contribution for your spouse, of up to 25% of compensation. This could give you a total household contribution limit of up to $114,000 per year.

You can defer up to 100% of your compensation to a 401(k) plan in a given year. This means you can contribute the entirety of your earned income, up to $19,500 in 2020, to your 401(k) plan.

If you're 50 or older, you can also make catch-up contributions of $6,500, totaling $26,000 in elective deferrals. This is a significant opportunity to boost your retirement savings.

As your own employee, you have the flexibility to contribute to your 401(k) plan, and you can do so up to the annual limit.

A partnership solo 401k is a type of retirement plan designed for business owners and their spouses.

You can establish a partnership solo 401k if you're a business owner with a limited liability company (LLC) or a partnership.