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Solo 401K

By Tal Rozen

What is Solo 401K? Solo 401K, also known as Individual 401K, is the newest addition to the Retirement Savings Plans family that includes Regular 401K, SEP IRA, SIMPLE IRA and Traditional IRA. The law that created this new retirement savings vehicle is the Economic Growth and Tax Relief Reconciliation Act of 2001, or EGTRRA. Since passing legislation Solo 401K became very popular with small employers because of its low maintenance cost and administration requirements (as appose to its more expensive family member, the regular 401K, Solo 401K does not require filing of IRS From 5500 as long as the plan has less than $250,000 in assets) and the ability to contribute up to 100% of the self employment income per year into the plan, to use it in your tax return, please click here.
The plan is open to to any type of ownership structure, including sole proprietorships, partnerships, Subchapter S corporations and regular corporations (known as C. Corporation). Who can set up Solo 401K plan? Solo 401K can be set up by a businesses with no employees (other than the business owners and spouses , partners or shareholders). Part-time employees who work less than 1,000 hours a year, or belong to a union or are non-resident aliens and excluded from the plan do not disqualify the business.
How much can I contribute into Solo 401K plan? The limit on Solo 401K contributions for 2010 is $49,000 ($54,500 if age 50 or older) and it is includes two components: 1) employee contributions, which are limited to 100% of net adjusted business income but no more than $16,500 or $22,000 if age 50 or older; and 2) Employer contributions, known as A profit sharing contributions, which are limited to 20% of net adjusted businesses income (Net adjusted business income is the gross business income minus all deductible business expenses and 50% of Self Employment Tax for the year).
Where do I report Solo 401K tax deduction? The Solo 401K tax deduction is really an adjustment to the income and not part of the Standard or Itemized deductions. It is reported on form 1040 line 28.
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