Solo 401 K Plan Adoption Agreement

Solo 401k Plan Adoption Agreement: What You Need to Know

If you`re a self-employed individual or a small business owner, you may want to consider setting up a Solo 401k plan. A Solo 401k plan, also known as an Individual 401k plan, is designed to provide retirement benefits to self-employed individuals and their spouses. It`s a great way to save for retirement while also taking advantage of tax benefits.

One important aspect of setting up a Solo 401k plan is the adoption agreement. This is the legal document that outlines the specifics of your plan, including who is eligible to participate, how contributions are made, and how distributions are taken.

Here`s what you need to know about the Solo 401k plan adoption agreement:

Eligibility

The first thing to consider when setting up a Solo 401k plan is who is eligible to participate. In general, any self-employed individual or business owner with no employees other than themselves or their spouse is eligible to participate in a Solo 401k plan.

Contribution Limits

Once you`ve determined who is eligible to participate, it`s important to understand the contribution limits for the plan. In 2021, the maximum contribution limit for a Solo 401k plan is $58,000. This includes both employee and employer contributions.

Employee Contributions

As the name suggests, a Solo 401k plan allows you to make contributions as both an employee and an employer. As an employee, you can contribute up to $19,500 to your plan in 2021, or up to $26,000 if you`re age 50 or older.

Employer Contributions

In addition to employee contributions, you can also make employer contributions to your Solo 401k plan. The maximum employer contribution is 25% of your net self-employment income, up to a maximum of $58,000 in 2021.

Distributions

Finally, it`s important to consider how distributions will be taken from your Solo 401k plan. Generally, distributions must begin by age 72, but you can begin taking distributions as early as age 59 1/2 without penalty. It`s important to note that distributions taken before age 59 1/2 may be subject to a 10% early withdrawal penalty.

In addition to the above considerations, your Solo 401k plan adoption agreement may also include provisions for loans, rollovers, and other specifics related to the plan.

Overall, setting up a Solo 401k plan can be a great way to save for retirement while also taking advantage of tax benefits. To ensure your plan is structured in a way that meets your needs, be sure to consult with a financial professional and review the Solo 401k plan adoption agreement carefully.