PENSCO Trust - Self Directed IRA | PLANS: Small Business IRA Solo(k) - Retirement Plans for small business owners

Small Business

SEP IRA

A SEP (Simplified Employee Pension) IRA is an employee benefit plan with compliance and reporting requirements simpler than those for qualified plans. For that reason, SEP IRAs are attractive for sole proprietors and small companies (up to 100 employees). Contributions (tax deductible to employers) must be made to IRAs because IRAs are the funding vehicle for SEPs.

Solo(k) Plan

A Solo(k) Plan is a 401(k) plan for business owners with no employees (other than a spousal employee). It is slightly more complex (to establish and maintain) than a SEP IRA, as it established for 'regular' multi-employee 401(k)s, but it has several distinct advantages over the SEP IRA, that make it a popular choice. If any of these appeal to you, it's likely worth the extra paperwork.

Depending on your financial situation, Solo(k)s often allow for greater contribution limits
Leveraged income does not generate UDFI tax (read more about this here)
You are permitted to take a personal loan from a Solo(k) Plan, unlike from an IRA

Is a SEP IRA for me?

SEP IRAs are most frequently established by sole proprietors, or business owners with only a spousal employee. It may also be used by employers with multiple employees (up to 100) who desire to make generous contributions on behalf of their employees.

Is a Solo(k) for me?

If you are self-employed, or if your business has no employees other than you and/or your spouse, then you should consider a Solo(k).

Contribution Limits

In 2009 a SEP IRA has a contribution limit of $49,000 ($46,000 in 2008). Contributions to a SEP IRA are generally 100% tax deductible and investment earnings in a SEP IRA grow taxed deferred.

Contribution Limits

You are allowed to make two types of contributions to a Solo(k), which is the reason it often allows for greater contributions than a SEP IRA. First, you can make ongoing 401(k) (also called elective deferral or salary reduction) contributions from your regular pay. Second, your business may also make profit sharing contributions.

Your maximum 401(k) deferrals for 2009, whether all pre-tax, all Roth 401(k), or some combination, is $16,500, plus a $5,500 catch-up amount if you will be at least age 50 in 2009.
Your maximum profit sharing contribution for any year is the lesser of:
1. $49,000 (the IRS may increase this amount for years after 2009), reduced by your total Roth and non-Roth 401(k) deferrals actually made, other than your "catch up" contributions described above, to your PENSCO Trust Solo(k) or;
2. Twenty-five percent of your compensation, or, if your business is unincorporated, of your earned income from your business.

Contribution Deadlines

The employer has until its tax filing date for its business, including any extensions, to make SEP contributions.

Solo(k) Adoption and Contribution Deadlines

The following explains the deadlines for adopting and contributing to your Solo(k) for 2009. Some of these deadlines for incorporated businesses (S corporations and C corporations) are different from those for unincorporated businesses (sole proprietorships, single member LLCs or husband-wife LLCs).

For incorporated sponsors:

Plan agreements

The deadline for the completion of the salary deferral election form, plan adoption and PENSCO Trust agreements is December 31, 2009.
The date of receipt by PENSCO Trust does not have to be by December 31, 2009; however, the forms must indicate that they were signed by that date.
While the postmark for mailing to PENSCO Trust does not have to be by December 31, 2009, it is suggested that it should be documented that the forms were signed by that date.

The 401(k) deferral component

The check for this component does not have to be dated or received by PENSCO Trust by December 31, 2009, but the amount has to be associated with your salary (compensation) in 2009 that WAS NOT already paid when the deferral election was signed. For example, if the salary earned for the last two weeks of the year is not physically paid or received when the deferral election form was signed, that salary may still be a 401(k) deferral (Roth or non-Roth) for 2009, up to the annual dollar limits. PENSCO Trust can accept it as a 2009 401(k) deferral even in 2010, provided the plan agreements were adopted in 2009, as discussed above. However, salary paid to you before plan agreements were signed can not be part of this component (e.g., if the plan agreements were adopted on December 24, 2009), then no portion of THE SALARY PAID BEFORE THAT DATE may be part of your 401(k) deferral for 2009.

Profit sharing contribution component

The profit sharing contribution for 2009 does not have to be received by PENSCO Trust until the tax filing deadline, including extensions actually granted, for the company. (For a company whose tax year is the calendar year, the deadline will be March 15, 2010, plus extensions actually granted.)

For unincorporated sponsors:

Plan agreements

The deadline for the completion of the salary deferral election form, plan adoption and PENSCO Trust agreements is December 31, 2009.
The date of receipt by PENSCO Trust does not have to be by December 31, 2009; however, the forms must indicate that they were signed by that date.
while the postmark for mailing to PENSCO Trust does not have to be by December 31, 2009, it is suggested that it should be documented that the forms were signed by that date.

The 401(k) deferral component

Self-employment income (not passive investment earnings such rents, dividends, interest) PAID (not necessarily earned) at any time during 2009 can be part of this component (up to applicable dollar limits) as long as the check for it is received by PENSCO Trust by the tax filing deadline for the participant ( April 15, 2010 plus extensions actually granted), as long as the salary deferral election form was completed in 2009.

Profit sharing contribution component

The profit sharing contribution for 2009 does not have to be received by PENSCO Trust until the tax filing deadline, including extensions actually granted, for the participant (April 15, 2010 plus extensions actually granted.) This contribution must relate to self-employment income (not passive investment earnings such rents, dividends, interest) PAID (not necessarily earned) during 2009.

Distribution Rules

Withdrawals after age 59½ are taxed as ordinary income. Withdrawals prior to age 59½ may incur a 10% IRS penalty as well as income taxes.

Distribution Rules

Your 401(k) deferrals and their earnings generally may be paid to you or your beneficiary only after you attain age 59½, become disabled within the meaning of the tax laws, or die. You may also receive payments of them if you terminate your PENSCO Trust Solo(k) plan and do not establish another 401(k) plan, other defined contribution plan (except for an employee stock ownership plan, SIMPLE IRA, or SEP IRA) within the times specified in the tax laws. In addition, you may elect in your adoption agreement to receive payment of these amounts on account of hardship or through a loan, under conditions described in your plan document and the tax laws. Special distribution rules may apply if you stop working for your incorporated business, or if your business is sold or acquired.

Profit sharing and rollover contributions to your PENSCO Trust Solo 401(k) plan may also be paid out if they have been in the plan for at least two years, or if you have participated in the plan for at least five years. Future changes to your plan will permit you to receive payment of your rollover contributions at any time.

You must begin taking minimum payments from your PENSCO Trust Solo(k) by April 1 of the year after you attain age 70½.

As the rules and restrictions on plan payments can be complex, consult your third party administrator or other pension professional to determine if you are eligible for a payment.

Payments you receive before age 59½ are subject to a 10% penalty tax (in addition to regular tax), unless an exception applies.

May I also fund an IRA or Roth IRA?

For both 2008 and 2009 tax years, SEP participants may also contribute up to $5,000 (or $6,000 if over 50) to an IRA or Roth IRA. However, because a SEP is an employee benefit retirement plan, an active participant in a SEP may not be able to deduct non-SEP contributions.

May I also fund an IRA or Roth IRA?

For both 2008 and 2009 tax years, Solo(k) participants may also contribute up to $5,000 (or $6,000 if over 50) to an IRA or Roth IRA. However, because a Solo(k) is an employee benefit retirement plan, an active participant in a Solo(k) may not be able to deduct non-Solo(k) contributions.