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Each individual retirement plan, such as one for a primary employer and another for a side business, has its own separate contribution limit of up to $72,000.
To contribute the maximum of $72,000 to a SEP IRA, an individual needs a net income of $360,000, as contributions are limited to 20% of net income.
An individual can contribute the maximum of $72,000 to a Solo 401k with a net income of approximately $235,000 to $240,000.
Using a mega backdoor Roth feature in a Solo 401k, an individual with at least $72,000 in net income can contribute the entire $72,000 to the plan.
A Form 5500-EZ must be filed for a Solo 401k plan once its total assets exceed $250,000 on December 31st of any year.
The penalty for failing to file Form 5500-EZ for a Solo 401k is $250 per day, up to a maximum of $150,000.
Solo 401k plans do not have the enhanced ERISA creditor protections found in employer 401k plans because they do not cover non-owner employees.
The primary retirement plan options for solo or small business owners are a SEP IRA or a Solo 401k.
Many small business owners default to a SEP IRA plan, even when a Solo 401k might be a better option, because the SEP is simpler and often the first recommendation from a CPA.
For individuals seeking additional tax deferral opportunities beyond a Solo 401k or SEP IRA, a defined benefit cash balance plan may be a suitable option.
The only retirement contribution limit that aggregates across all of an individual's plans is the employee deferral limit of $24,500.
A Solo 401k plan is no longer considered 'solo' and becomes a standard 401k once a W-2 employee becomes eligible to participate.