Eligibility to open and maintain a solo 401(k) plan?

There are two natural markets for the single-participant

401(k). The first includes independent contractors, sole proprietors, and owner-only C or S corporations. The second market is those who have dual incomes. They are W-2 wage earners as employees of a company that offers a 401(k) plan who also have consulting income from corporate directorships or freelance work that requires them to file a Schedule C as a sole proprietor. These are the kinds of taxpayers who should be interested in the single-participant 401(k) arrangement because these dual earners traditionally are looking for a way to shelter additional retirement money. If, during the year an employee is already contributing the maximum to a 401(k) or 403(b) plan at work, then the benefits of establishing a single-participant 401(k) plan would disappear. Milt Baker CPA

I am not aware of any requirements to open a solo 401k that involve subsequent years (the examples you gave). There is a filing requirement for a Form 5500(-EZ) if plan assets exceed a certain amount or in the year of final distribution of all plan assets. If the taxpayer hires employees, things change.

-Mark Bole

True -- but I was wondering about what makes you eligible to open snd maintain a solo 401k as a sole proprietor. Is filing a Sched C for a legit business good enough? Does the business have to stay in operation to be able to maintain the plan, etc.?

-- Rich Carreiro snipped-for-privacy@animato.arlington.ma.us

Well, yes and no. If an employee is contributing the maximum ($15K or $20K depending on age) to an employer-sponsored plan, but the employer is not contributing $29K (to reach the personal limit of $44K/$49K), then there is still a reason for the self-employed to open an employer plan. That is, to add more from the employER side. But if all one is going to do is add employer contributions and not employee contributions, a SEP-IRA will work as well, and has less paperwork. Since I have maxed out my 401(k) contribution with my (former) employer, that's what I will do this year. Next year, I open the Roth 401(k). Mark Freeland snipped-for-privacy@sbcglobal.net

Milt Baker CPA