What You Need to Know About an S Corp Solo 401k

A Solo 401(k) is a retirement savings plan designed for self-employed individuals and small business owners with no employees. They are one of the most common retirement plan options for S corps. Here are some key points to know about an S corp Solo 401k:

Eligibility and Setup

Solo 401ks are available to owners of S corporations, provided they have no full-time employees other than a spouse. If there are multiple owners/shareholders, an S corp can still sponsor a Solo 401k, given there are no employees outside the owners. In this scenario, each owner would set up their own S corp Solo 401k account. 

Regarding part-time employees, an S corp can employee part-time employees and have a Solo 401k account. However, one employee cannot work more than 1,000 hours in a calendar year or more than 500 hours per year for three consecutive calendar years. If all part-time employees are less than these hour thresholds, an S corp can have a Solo 401k with part-time employees.

Contribution Limits for an S Corp Solo 401k

Contributions are broken up into two categories, the employee and employer portion. For employee contributions, an S corp owner can contribute 100 percent of their W-2 wages, up to $23,000. The employer contribution is limited to 25 percent of the owner’s W-2 wages, not business profit.  The total employee plus employer contributions cannot exceed $69,000 ($76,500 for those older than 50) per year.
 

Tax Benefits

  • Tax-Deductible Contributions: Contributions to an S corp Solo 401k are tax deductible on the owner’s personal return, ultimately, lowering their tax bill. 
  • Tax-Deferred Growth: Contributions to a Solo 401k grow tax-deferred until withdrawn, potentially lowering your taxable income during high-earning years. Business owners are not taxed on interest, dividends, or capital gains until funds are withdrawn.
  • Roth Option: Many Solo 401k plans offer a Roth option, allowing for after-tax contributions that grow tax-free and are tax-free upon withdrawal.

Distributions and Withdrawals

  • Qualified Distributions: Withdrawals taken after age 59½ are penalty-free, but ordinary income tax applies to traditional 401k distributions. Roth 401k distributions are tax-free if the account is at least five years old and the distribution occurs after age 59½.
  • Early Withdrawals: Withdrawals taken before age 59½ may be subject to a 10 percent early withdrawal penalty unless an exception applies.

Advantages of an S Corp Solo 401k

  • Higher Contribution Limits: Solo 401ks often allow for higher contributions than SEP IRAs, especially for those with lower self-employment income.
  • Roth Option: The availability of a Roth option in Solo 401k plans offers tax diversification that SEP IRAs do not.
  • Investment Choices and Flexibility: Solo 401k plans often provide a wide range of investment options, including stocks, bonds, mutual funds, real estate, and other alternative investments.
By understanding these aspects of Solo 401ks, S Corporation owners can effectively leverage this retirement savings vehicle to maximize their retirement savings, achieve their financial goals, and lower their tax bill. If you would like a referral to set up and/or manage a Solo 401k for your S corp, I am happy to provide a referral, just Click Here. 

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About the Author

Brett Rosenstein

Brett Rosenstein

Founder of S Corp Advantages
Certified Public Accountant

Brett is the founder and president of S Corp Advantages where he specializes in S corporations. He helps business owners understand if an S corporation election is right for their business. He also keeps current S corps in compliance with IRS regulations.

Brett received a Bachelor of Science in Business Administration from The Ohio State University. He is also a Certified Public Accountant.

When Brett is not working, he is running, biking, spending time with his wife and daughter, or trying new pizza places around Chicago.

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