Solo 401k With an LLC
Solo 401k plans provide business owners and self employed professionals the option of sponsoring their own retirement plan through business entities like sole proprietorships, partnerships or LLCs. Funds go first into your 401k account before being distributed further to a special purpose LLC that serves as an asset within your 401k account.
To qualify, self-employment income must be earned. Your spouse can also work from the same business to make up some of this requirement.
LLCs are taxed as sole proprietorships
An LLC may elect to be taxed as an S corporation, which could help lower self-employment taxes and put more funds into your business. Before making this decision, however, it’s wise to consult an accountant regarding its consequences.
A Solo 401k plan can be an ideal retirement savings solution for self-employed and small business owners who operate freelance or side hustle businesses. With high contribution limits and great investment flexibility, as well as real estate investments and liability protection.
To qualify for a Solo 401k, you must not employ full-time workers. Contribute up to $20,500 in 2022 in pretax or after-tax funds; catch-up contributions of $6,500 are allowed if over 50. Also necessary: sign an operating agreement between yourself, bank and custodian of LLC who manage your LLC as well as establish list of disqualified persons such as family members if applicable.
LLCs are taxed as partnerships
Though LLCs and sole proprietorships are both pass-through entities, their tax treatments differ significantly due to different rules applied by the IRS for each type of entity; LLCs are taxed under Subchapter K while sole proprietorships fall under Subchapter S; however both types qualify for Solo 401k plans.
To qualify for a Solo 401k, you must be self-employed with no full-time employees and operate your business without direct competition with it. Additional businesses are allowed provided they do not compete directly with your Solo 401k plan – although employee contributions cannot be made to both plans simultaneously.
New Mexico LLCs make for an excellent Solo 401k solution as they allow you to invest in real estate and precious metals with protection from personal debts and bankruptcy, plus cryptocurrency investments can even be made. However, make sure your New Mexico LLC is designated as Special Purpose LLC for this type of Solo 401k to work correctly.
LLCs are taxed as corporations
If you own a small business, establishing a solo 401k may be worthwhile. This IRS-approved plan enables you to invest in traditional assets like stocks and bonds as well as nontraditional ones like real estate or private equity – though remembering any withdrawal before age 59 1/2 could incur income taxes.
Contrary to a Traditional IRA, solo 401k plans allow both employee deferral and profit sharing contributions; in 2017, these limits are up to $18,000 employee deferrals and 25% profit sharing contributions (totaling $54,000 combined maximum).
LLCs are pass-through entities and, unlike C corporations, do not incur entity-level taxation. Most states nevertheless levy some form of LLC taxation in some way such as through franchise or registration fees; some also require filing Form 1065: U.S. Return of Partnership Income as well as providing each owner with their individual Schedule K-1s each year which detail each member’s share of income, losses, credits and deductions from the LLC.
LLCs are taxed as trusts
A Solo 401k is a special type of 401(k), which allows an LLC to sponsor the plan. This makes it an excellent alternative to SEP IRA for self-employed individuals and small business owners, as it provides more flexible investment options such as nontraditional investments while giving “checkbook control” over retirement assets without needing to pay a custodian fee. Furthermore, Solo 401ks provide greater asset protection by isolating individual’s personal assets from those of the company.
Solo 401k plans are most frequently utilized by sole proprietors and single-member LLCs; however, they can also be adopted by multiple member LLCs and partnerships providing there are no full-time employees. Furthermore, an LLC may sponsor one even after changing business structures; this may necessitate restatement of plan with subsequent changes impacting contribution limits and assets. In 2022 an individual may make up to $20,500 (plus catch-up contribution of $6,500 if over 50). Furthermore, employer profit sharing contributions should reach 25% of owner compensation.