401(k)s

A solo 401(k) helps you make the most of your retirement savings. So, whether you’re a full-time real estate agent or a part-time carpenter, it can be a powerful tool to help you build a secure retirement.

Want some help deciding if a Solo 401(k) is right for you? That’s what COUNTRY Trust Bank® is here for. Put our 40-plus years of retirement plan experience to work for you. Contact one of our local representatives to get started.

The Solo 401(k) is reserved for self-employed individuals with no employees. The most common exception is that you can employ your spouse. The big benefit it has over IRAs is you can contribute substantially more. It may be a good option for sole proprietors, single-employee corporations, independent contractors and freelancers.

It used to be that the self-employed were severely limited in how much they could contribute to their future retirements. Thanks to favorable tax laws, though, the Solo 401(k) rules changed that by giving you two ways to contribute – as an employee and employer.

Employee contribution

You can contribute a pretax and/or Roth salary deferral as an employee of your business of $23,000 in 2024 (indexed) or 100% of compensation, whichever is less. Employees aged 50 and older may contribute an additional $7,500 as a catch-up contribution.

Employer contribution

You can also contribute as an employer, and the limit is significant – 25% of your eligible compensation up to $69,000 for 2024. For sole proprietors or single-member LLCs, employers can contribute about 20% of eligible compensation, depending on the type of business, up to a maximum contribution of $69,000 for 2024.

Combining the features of a traditional 401(k) and a profit-sharing plan, a Solo 401(k) has additional features besides those high contribution limits:

Optional contributions

While you can make high contributions every year, it's not required. Funding is discretionary each year, and you can contribute as much or as little as you want up to annual IRS limits.

Governmental reports

You don’t have to file governmental reports until the plan’s total assets are over $250,000 or you terminate the plan.

Taxes

The contributions you make as an employer are tax deductible. The contributions you make as an employee can reduce your taxable income. Any investment growth is tax-sheltered until distribution. There may be a penalty for early withdrawal.

When to establish your plan

If you want your initial Solo 401(k) contribution credited for a specific calendar year, you must establish the plan by December 31 of that year. You don’t have to make the actual contribution, though, until that year’s tax-filing deadline.

With the available tax-deductions for your business, it’s a valuable part of your benefits package. With the tax-deferral and growth potential for your employees, it can be a high-value benefit for their futures.

A 401(k) might be a good choice if you want a retirement plan that allows participants to contribute pre-tax money with tax-deferred earnings and your company is an incorporated business, a self-employed business, or a not-for-profit organization.

Employee contribution

If your employees decide to participate, they can choose what percentage of their compensation and/or Roth they want to contribute to the plan, up to a set annual limit. For 2024, total contributions can be $23,000 or 100% of compensation, whichever is less.

Contributions by owners and highly compensated employees may be limited, based on participation by other employees. If that’s an issue, a Safe Harbor 401(k) might be worth considering.

Participants aged 50 and older can make an additional catch-up contribution of $7,500 annually.

Employer contribution

As the employer, you have the option to offer a match. That’s a tax-deductible contribution to the participants’ accounts that match their contribution up to a certain dollar amount or percentage of compensation. Employers may also choose to make a discretionary non-elective contribution to all eligible employees each year.

The overall maximum employee/employer contribution per eligible employee in 2024 is 25% of compensation up to $69,000 (including deferrals). 

Employee participation rules

There are a couple of rules governing who can participate in the plan. Generally, employees who are 21 years old and have worked for you for over one year (minimum of 1,000 hours in that year) are eligible to participate.

Can employees take loans from their 401(k) plan?

When working with COUNTRY Trust Bank to design your plan, you have the option to allow participants to take loans from their accounts. The money is repaid at an interest rate based on the current lending environment. The repayments and interest are credited back to the participant’s account.

Loans vs. withdrawals

Instead of a loan, participants can generally withdraw money from the plan for the following reasons: retirement, disability, death (beneficiary withdrawal), termination of employment or financial hardship. Applicable taxes will be assessed, and a possible 10% tax penalty may apply.

Some tests are hard to pass. For example, small businesses sometimes have trouble passing the IRS-required 401(k) non-discrimination tests. These are tests designed to make sure all participants in a 401(k) are treated fairly, regardless of compensation levels. That sounds like a good thing, but that rule can be a problem for small employers.

The challenge of non-discrimination tests

Non-discrimination tests compare Highly Compensated Employees¹ (HCEs) and Non-Highly Compensated Employees (NHCEs). For example, the IRS says that:

• 401(k) deferrals by the HCEs can be limited by the NHCEs deferrals
  
• Key Employee²  account balances generally can’t be more than 60% of the assets in the plan without additional contributions to the non-key employees

If the NHCEs don’t participate or contribute much, then the HCEs can’t contribute much. It can easily happen in businesses without a lot of employees, and that’s a problem if the HCEs want to make significant contributions.

The solution: the Safe Harbor 401(k)

A Safe Harbor 401(k) might be a good choice if you're a small business with a small staff.

In exchange for relief from the non-discrimination testing requirements and allowing for higher contributions by HCEs, you’ll have to either make non-elective contributions or matching contributions. Of course, we’re here to help you decide which of these two options is most advantageous for your business, and we’ll help you with the calculations.

Non-elective contributions

You can make a non-elective contribution of at least 3% of compensation for each NHCE eligible to participate in the plan.

Matching contributions

You can make matching contributions under a “qualifying matching formula.” The basic matching formula is 100% of the first 3% of compensation deferred + 50% of deferrals between 3% and 5% of compensation. The minimum enhanced matching formula is 100% of deferrals, up to 4% of compensation. The matching formula is different if your plan has a qualified automatic contribution arrangement.

Contributions

You can’t set conditions for receiving safe harbor contributions. For example, you can’t say that plan participants must be employed on the last day of the plan year or work at least 1,000 hours during the plan year. You can, though, have minimum age and service requirements to be eligible to participate in the plan.

Impact on your plan design

If your existing 401(k) isn’t currently a safe harbor plan, but you think it might be a good idea, be aware that safe harbor provisions can’t be added to an existing 401(k) during a plan year. You must amend your plan to add a safe harbor design for the next plan year, with the amendment adopted before the first day of the new plan year.

Employee notices

Before the start of each plan year, you must give each eligible employee a notice of rights and obligations under the safe harbor plan. Employees who will be eligible to participate during the year also need to get the notice.

Vesting

All safe harbor contributions are immediately 100% vested.

Withdrawals

Safe harbor contributions generally aren’t available for in-service withdrawals before age 59½.

Plan documents

Plan documents must state if safe harbor or non-safe harbor testing will be used. Our retirement plan specialists will help customize your plan documents to best fit your situation.