‘Solo K’ Retirement Plan
Michael J. Knight
- A “Solo K” retirement plan is a flexible and
easy way to maximize retirement savings for small, single-owner
businesses. This plan adds profit sharing to existing 401(k)
plans. Business owners can not only maximize their 401(k)
contribution ($13,000 for 2004 if under age 50; $16,000 if
over age 50), but can also pay themselves a tax-deductible
profit-sharing portion based on net earnings. Solo K plans
allow a contribution of up to 20% of modified net profit (net
profit minus one-half of the self-employment tax). Under certain
circumstances, owners can contribute almost dollar for dollar
on their earnings. For example, with a net income of $20,000,
a self-employed individual over the age of 50 could have contributed
$19,717 for 2004:
401(k) deferral: $16,000
Qs SE tax (1,413)
Profit sharing: $18,587
x 20% 3,717
Total contribution amount $19,717
entire contribution of $19,717 can be made when filing the
individual tax return. S and C corporations, however, must
contribute the 401(k) portion throughout the year, as the
salary is paid to the owner (within 15 days).
benefits of Solo K plans include the following:
Access to tax-free loans. Loans are not permitted
with traditional or Roth IRAs and SEP IRAs.n Minimal administration
costs. The Solo K plan is inexpensive to maintain. Annual
administration fees range from $30 to $200.
contribution amounts. Each year, funding is up to
the owner, who can increase or decrease funding accordingly.
of existing plans. IRAs, SEP plans, and others can
be consolidated into a Solo K plan.
K plans are not for everyone. They are best suited for the
A full-time employee not covered by an employer’s
401(k) plan who earns more than $50,000 of self- employment
part-time self-employed individual earning more than $50,000
(common examples include self-employed real estate agents
family business that employs the owners and their immediate
family, such as spouses and children.
proprietorships, partnerships, and corporations (including
subchapter S and C corporations) that are owner-only businesses
or that have only part-time employees (working less than
1,000 hours per year).
to Apply a Solo K
Solo K plans can be challenging. Pension actuaries and banks
generally do not know much about Solo K plans. Some brokerage
firms are aware of the plans, but usually it is not easy
to find someone to help.
are a few rules to follow:
The plan must be opened during the calendar year the income
is earned. Unlike a traditional IRA, one cannot wait until
the April 15 after the year-end to open a Solo K plan.
The 401(k) portion of the contribution must be made as
an individual’s salary is paid out. For example,
if one makes $1,000 per month in earnings, that amount
should be placed in the Solo K account.
profit-sharing portion can be contributed during the normal
filing of personal income tax returns, including extensions.
Sole proprietors, however, may fund both the 401(k) portion
and the profit-sharing portion during the filing of their
personal return, including extensions.
J. Knight, CPA, practices in Fairfield, Conn. He
would like to thank Ryan C. Sheppard, CPA, for his assistance
in preparing this article.