Solo 401(k) Flexibility
In December, President Biden signed the SECURE 2.0 Act of 2022 (SECURE 2.0) into law. SECURE 2.0 has over 90 changes to help retirement savers and to urge more employers to offer retirement plans. One of these changes allows more flexibility for the Solo 401(k).
What is a Solo 401(k)?
A Solo 401(k) is a regular 401(k) plan that has been adopted by a sole proprietor or any other entity that does not have full-time employees. These retirement plans work great for consultants, independent contractors, or sole proprietors in general. Keep in mind there are two hurdles to jump to be eligible to benefit from a Solo 401(k):
- Must have self-employment activity.
- Can’t have full-time employees.
What makes the Solo 401(k) so great?
- Ability to make pretax or Roth annual contributions of up to $66,000, or $73,500 if you are at least age 50 in 2023.
- You can borrow the lesser of $50,000 or 50% of the plan account value tax penalty free and use the loan however you choose.
- As the plan trustee, you can invest in both traditional and alternative assets, such as real estate.
- You can use a nonrecourse loan to acquire real estate without triggering UBTI tax.
What did SECURE 2.0 change?
The first version of SECURE allowed a sole proprietor to set up a retirement plan in the current year and make employer profit sharing contributions for the previous taxable year. SECURE 2.0 went a step further and now allows both employee and employer contributions to be made for the prior year as long as the contributions are made by the deadline of the individual’s tax return. This provision goes into effect for tax year 2023.
Consult with your tax professional at Ketel Thorstenson about this or other tax matters because each situation is different. Don’t navigate the difficult and ever-changing tax codes and legislation on your own. Ketel Thorstenson CPAs and tax professionals receive advanced training and continuing education all year long to keep our services on the forefront of the tax industry. Call us today for guidance on tax planning, tax return preparation, and tax legislation.