Solo 401(k) Plan: An Ideal Retirement Plan for the Farm or Ranch Owner
A Solo 401(k) plan can be an ideal retirement plan for the farm and ranch owner who either does not have employees or who has employees who may be excluded from coverage.
A Solo 401(k) offers several benefits, including little to no administration fees, high annual contribution limits, a choice of pre-tax or after-tax (Roth) contributions and the ability to make loans from account balance.
Under the 2016 Solo 401(k) contribution rules, a Solo 401(k) plan participant under the age of 50 can make an annual maximum employee deferral contribution of $18,000. If you are age 50 or older, this amount is increased to $24,000 per year. Employee deferral contributions can be made in pre-tax or after-tax (Roth) dollars.
In addition to employee deferral contributions, the business can make a 25 percent – or 20 percent in the case of a sole proprietorship or single member LLC – profit sharing contribution up to a combined maximum, including the employee deferral, of $53,000 for those under age 50 and $59,000 for those age 50 or older.
Unlike a regular 401(k) plan, a Solo 401k plan can only be set up for self-employed individuals or small business owners who have no other full-time employees and who are not employed by any business owned by them or their spouse. An exception applies if your full-time employee is your spouse. The business owner and their spouse are technically considered “owner-employees” rather than “employees.”
You are able to exclude certain employees from participating in your Solo 401(k) plan. The following types of employees may be generally excluded from coverage: employees under 21 years of age, employees who work less than a 1,000 hours annually, union employees, and nonresident alien employees.
If you have full-time employees who are age 21 or older other than your spouse or part-time employees who work more than 1,000 hours a year, you will typically have to include them in any plan you set up. However, a Solo 401(k) eligible business can have part-time employees and independent contractors.
Another advantage of Solo 401(k) accounts over Individual Retirement Accounts (IRAs) and Simplified Employee Pension Plans (SEPs) is the ability to take out loans from your account.
A Solo 401(k) plan participant is able to borrow up to 50 percent of their total account value or $50,000, whichever is less. This loan is tax-free and can be made for any reason. Repayment of the loan is based on a schedule provided when the loan is initiated and must be deposited back into the account, including interest, over a term of up to five years. Loan payments must be made at least quarterly and at a minimum interest rate equal to the U.S. prime rate. Failure to make loan payments may cause the loan to default which may result in taxes and IRS penalties.
While I don’t advocate making loans from your 401(k), the ability to make them is an added benefit of this retirement plan.
Two of the most important decisions with a Solo 401(k) plan are how to invest your money in the retirement plan and how much of the employee deferral to allocate to pre-tax versus Roth. A good financial advisor can assist you with both of these decisions.
Chris Nolt is the owner of Solid Rock Wealth Management, Inc. and Solid Rock Realty Advisors, LLC, sister companies dedicated to working with families around the country who are selling a farm or ranch and transitioning into retirement. For more information, visit solidrockproperty.com and solidrockwealth.com.