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The important numbers to know for 401(k) plan owners

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The Solo 401(k) is a unique retirement plan structure in which the plan participant wears many hats. The plan is designed for self-employed individuals or small-business owners without any other full-time employees. The business owner is both the employer and also the only employee who qualifies to participate in the plan (although the owner’s spouse may also be able to participate). In a self-directed Solo 401(k), the plan owner is also the trustee and the plan administrator.

Because of this structure, the plan owner can enjoy great control and flexibility. However, it also comes with certain responsibilities. Solo 401(k) plan owners are responsible for keeping their plan in compliance with regulations. Here are some important numbers that plan owners need to keep in mind.

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$250,000: Balance that triggers tax-filing requirement

Compared with a traditional 401(k) plan, a Solo 401(k) requires much less administrative effort. Plan owners are responsible for keeping records of all transactions. Typically, a Solo 401(k) plan owner is not required to file a tax return for the plan. However, this changes when the assets in the plan exceed $250,000.

If the total value of a Solo 401(k) plan exceeds $250,000 at any time during a tax year, the plan administrator must file a return for the Solo 401(k) for that year. The good news is that filing isn’t very complicated. A Solo 401(k) plan administrator can simply file Form 5500-EZ with the IRS.

$50,000: Maximum that Solo 401(k) plan owners can borrow

A Solo 401(k) owner can borrow money from the plan at any time, for any reason. There is no complicated loan application process, and the interest rate on 401(k) loans is usually lower than for bank loans.

However, plan owners can borrow a maximum of $50,000 or 50% of their total account balance, whichever is less. The loan must also be repaid within five years. Plan owners must be aware of the loan limit and stay on top of their repayment schedule. If you fail to repay the loan properly, the loan may be treated as a withdrawal from the plan, and taxes and penalties may apply.

10%: Penalty rate for early withdrawal

Even though the Solo 401(k) is unique in many ways, it is still a “qualified” retirement plan under the tax code. Like other qualified plans, a Solo 401(k) is intended only for use as retirement savings. To discourage early withdrawal, there’s a 10% penalty on money taken out before age 59½, on top of the taxes due on the withdrawal. This is why most plan owners should to consider a Solo 401(k) early withdrawal only as a last resort. Withdrawals after age 59½ are still taxed, but there’s no additional penalty.


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