Can You Have A Solo 401k With An LLC?
Sunday, September 24th 2023
As more financial instruments emerge and entrepreneurial efforts flourish, a question has surfaced regarding whether one can establish an LLC with their Solo 401k account. While technically this option exists, certain conditions must first be taken into consideration and this article aims to delve into that topic in depth.
Know Your Basics of Solo 401Ks and LLCs
Prior to delving deeper, it’s crucial that we grasp the fundamental concepts. Here are two of them that form the core of this discussion.
- Solo 401k (1): Also referred to as an individual or one-participant 401k plan, Solo 401ks provide retirement savings plans tailored specifically for self-employed individuals or small business owners without employees other than themselves and spouse. They allow these business owners to save for retirement with tax advantages offered by these retirement accounts.
- Limited Liability Company (LLC,2): An LLC is an alternative form of private limited company in the US that combines pass-through taxation of partnerships or sole proprietorships with limited liability protection afforded to corporations – so its members (owners) don’t become personally responsible for its liabilities and debts.
Eligibility for Establishing an LLC-Owned Solo 401k Plan
Under these definitions, an LLC owner or member can establish their own Solo 401k provided they meet certain criteria:
- Self-employed income: Individuals engaging in self-employment as sole proprietors, partners or members of an LLC should earn earnings primarily from providing goods or services rather than investments.
- No full-time employees: Your business should avoid hiring any full-time employees other than its owner and his/her spouse; “full-time” is defined as any worker working over 1,000 hours annually.
Advantages of Solo 401K Plans for LLCs
Establishing a Solo 401k account presents many advantages to an LLC:
- Higher contributions: As of 2023, Solo 401k plans allow employee and employer contributions up to $66,000 annually or $73,500 for those aged 50 years old or above compared with other plan types, providing increased retirement savings potential than competing plans.
- Tax benefits: Contributions to a Solo 401k are often tax-deductible, helping reduce taxable income while earnings accumulate tax-deferred until withdrawal.
- Loan provision: Solo 401k plans may provide access to plan loans as an emergency buffer.
How to Establish an Individual Retirement 401K Account with an LLC
If you own an LLC and wish to establish a Solo 401k plan, here are the steps typically involved:
- Create the plan: In order to establish your Solo 401k Plan document with any financial institution where it will reside.
- Set up a trust for the assets in your plan: All solo 401k assets should be placed into trust to guarantee they’ll only ever benefit their plan owner or their beneficiaries, usually with the business owner serving as trustee.
- Employer Identification Number (EIN): As per IRS requirements, Solo 401k accounts require their own EIN in addition to having one given out by an LLC already existing EIN number.
- Manage and administer the plan: As trustee of their plan, business owners are expected to monitor its investments while adhering to IRS reporting requirements.
Potential Pitfalls and Considerations
Though Solo 401k plans offer attractive advantages, LLC owners should also carefully consider possible downsides:
- Administrative complications: As plan trustee, business owners are accountable for administering their Solo 401k plans according to IRS regulations, possibly filing annual reports (Form 5500s) when assets exceed $250,000.
- Contribution restrictions: Contribution limits in Solo 401k plans depend on earnings from self-employment; this means if LLC income varies significantly over time, so will contribution limits.
- Prohibition on employees: Once an LLC hires employees, its Solo 401k loses its “solo” status and may need to switch retirement plans in order to remain valid.
Thus, yes. A LLC owner who has no full-time employees (other the spouse) who earn self-employment income and wants to have an option for retirement savings like Solo the 401k could easily create one. Although Solo 401k offers many advantages such as high contribution limits and tax advantages, it also comes with as potential issues to be considered prior to implementing this strategy for retirement savings.
As with any financial decision, consulting a financial advisor or tax professional before taking action on Solo 401k plans is recommended to gain full insight and make informed choices. With proper guidance and careful planning, an LLC may leverage Solo 401k accounts effectively towards creating a safe retirement strategy.
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