Small Business Tax Deductions

My Favorite Retirement Plan – the Solo K or Single K

There are lots of options for retirement plans and each different “wrapper” has different options and requirements.  It can be a very confusing decision to navigate these plans, but for small family-owned businesses, one type offers significant benefits that cannot be beaten.  The Single K, Solo K, or Single Owner-Employee 401k plan is a winner and has some unique benefits and still maintains low fees.  Different brokers have different names for this program, but they all follow the same rules as allowable by ERISA laws.  The plans are designed for entities that employ: (1) Owners and spouses, owner’s parents, children and grandchildren, and (2) Owners with excludable part-time or seasonal employees. This plan is not designed for employers with full-time, rank-and-file employees.

Here are some important benefits:

  • Employees (including owners) can contribute up to 100% of employee’s compensation, or $18,500.  Individuals age 50 and above may contribute an additional $6,000 in catch-up contributions, for a maximum of $24,500.
  • Employers may make tax-deductible profit-sharing contribution up to 25% of total compensation.
  • Overall contribution maximums may not exceed the lesser of $55,000, or 100% of compensation. $275,000 is the maximum compensation that can be used when calculating contributions.
  • Loans: Participants may borrow up to 50% of their retirement account balance or $50,000, whichever is less. The minimum loan amount is $1,500.  You can roll over other retirement plans (IRAs, 401(k)s, SEP, or SIMPLE IRA) into this plan to increase your account balance and allow a larger possible loan amount.  Loans do not create taxable events unless you default on paying the funds back.  This is the only plan type that allows for loans (other than more expensive traditional 401(k) programs with much higher fees).
  • Fees:  Administration of this type of retirement plan does not involve all of the testings for highly compensated employees or discrimination testing like traditional 401(k) accounts so fees are minimal.

So why is this plan type so much better than a SEP, SIMPLE, or IRA plan?  It allows the largest possible tax deduction for retirement savings and gives you an important backup loan source if any business or personal emergencies should arise.  Even if you don’t think you will fund to the maximum contribution limits, set this type of plan up to allow you the most flexibility and the ability to access your retirement funds through a loan in an emergency.