At The Money: How to Max Out Your Small Business Retirement Plan | Masters in Business
From Masters in Business
At The Money•Partner & Head of Corporate Retirement Planning, Ritholtz Wealth Management
Executive Summary
Solo 401k plans offer greater contribution flexibility and higher potential savings at lower income levels compared to the simpler SEP IRA, especially when utilizing the mega backdoor Roth feature.
The annual retirement plan contribution limit (e.g., $72,000) is per plan, not per person, allowing individuals with a primary job and a side business to establish a second plan and contribute up to another full limit.
Solo 401k plans carry a significant compliance requirement: filing Form 5500-EZ once plan assets exceed $250,000, with failure to file resulting in steep penalties of $250 per day.
Contrary to a common misconception, Solo 401ks and SEP IRAs do not have the enhanced ERISA creditor protection that standard employer 401k plans do; their protection is equivalent to that of a traditional IRA.
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Concerns Raised
The complexity of retirement plan rules can be confusing for business owners.
Significant penalties ($250/day) for failing to file Form 5500-EZ for Solo 401k plans over $250k in assets.
Solo 401ks and SEP IRAs lack the enhanced ERISA creditor protection found in corporate 401k plans.
Hiring a non-owner W-2 employee can disqualify a Solo 401k plan, complicating growth.
Opportunities Identified
Utilizing a Solo 401k to contribute up to $72,000 at a lower income threshold than a SEP IRA.
Stacking a side-hustle retirement plan on top of a primary employer's plan to contribute an additional $72,000.
Employing a spouse in the business to participate in the Solo 401k, effectively doubling household contribution potential.
Using the mega backdoor Roth feature in a Solo 401k to make large post-tax contributions.