Can You Have a Solo 401k With an LLC?
There can be confusion around which business structures qualify for a solo 401k account. A sole proprietorship is typically considered the easiest structure as its income flows directly onto Schedule C of its member’s tax return.
Single-member LLCs may create a solo 401k plan for the full taxable year up to and including tax filing (including extensions) date, with options to add employee deferrals and profit sharing contributions.
Taxes
When investing with your Solo 401k in a New Mexico LLC, there are certain tax considerations you must keep in mind. For instance, understanding prohibited transaction rules is key as this helps prevent violating tax code by indirectly or roundaboutly benefiting disqualified persons or violating another regulation.
Real estate investors, for instance, might set up an LLC that owns and manages rental properties. They would then make employee deferral and employer profit-sharing contributions that do not exceed the maximum contribution limit.
Keep in mind that Solo 401k funds are held in trust for participants and their spouse, so any transactions which violate this restriction should be avoided – for instance lending funds from one’s Solo 401k directly to an LLC which then uses them to purchase rental properties would violate these rules and thus should be avoided.
Funding
Depending on the nature of your one-person business or self-employment situation, Solo 401(k) could be an excellent retirement savings vehicle. To be eligible for one, certain eligibility requirements must be fulfilled – most significantly producing all income through it directly as salary and profit-sharing contributions to qualify; funds from traditional and Roth IRAs can also be transferred in.
Your second requirement should be that no non-owner full-time employees work at your business; this does not apply to spouses who may contribute up to an amount equaling 50% of your income.
Contribution limits for a Solo 401(k) LLC are similar to traditional 401(k). You may make employee deferral contributions until your tax return due date (with extensions), as well as employer profit-sharing contributions up to the amount of business income.
Operating agreement
Solo 401k plans provide small business owners (sole proprietors, partners and certain independent contractors) who don’t employ anyone a retirement savings option that allows for maximum contributions up to $66,000 annually and includes profit sharing contributions.
An LLC operating agreement should contain details regarding roles and responsibilities for members, profit disbursements and voting procedures as well as disputes among them and how to resolve them. Furthermore, this document should contain provisions on how the LLC will dissolve in the future.
The agreement should also specify whether or not an LLC is member- or manager-managed, with manager-managed entities being defined by their responsibilities, salary and how to replace or fire their manager(s). It should also outline procedures for collecting rental income; when funds return from an LLC investment they will be divided equally between pretax and Roth subaccounts according to how much original capital was invested with each type.
Investments
Investment of your 401k into an LLC has many advantages. For one thing, it can reduce taxes and protect assets in case of litigation. Furthermore, New Mexico LLCs boast increased contribution limits than other business structures, enabling employees and employers to save more than they could with an IRA account.
As another advantage, an LLC will have its own bank account and can purchase real estate without impacting 401k funds; however, when purchasing one using these funds it must adhere to any prohibited transaction regulations that may exist.
Misconceptions about solo 401ks include that it can only be utilized by sole proprietors; this is incorrect as, unlike traditional IRAs, the solo 401k is open to any business structure and even partnerships if no employees exist.
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