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What your CPA needs to know about the Solo 401k

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Got a Solo 401k? Then you need your CPA to be familiar with your Solo 401k, too! Opening a Solo 401k where you are the administrator, custodian, trustee and participant can be a daunting task. After all, you have to stay in line with documentation, tax filing, what you can and can’t invest in and keep good records of any and all investments.

This is where a good CPA can be invaluable. A good CPA can save you hundreds, if not thousands, of dollars when it comes time to file your taxes. But not all CPAs are familiar with the Solo 401k. Here at Solo, we provide all of our clients with a list of CPAs that are well-versed in the self-directed industry. But what if you want to use a CPA you already have and like?

Check below for a list of things your CPA needs to know about the Solo 401k:

Legality of Your Qualified Retirement Plan

First off, let’s cover the biggest stumbling block we hear from CPAs/accountants who are unfamiliar with the Solo 401k. For those who are unfamiliar with the Solo 401k, it seems too good to be true. However, the Solo 401k is 100% legal and isn’t even a new type of plan.

Changes in the Economic Growth and Tax Reconciliation Act in 2002 made it possible for sole business owners to take advantage of a 401(k) plan through their business. Nabers Group was the very first non-custodial document provider in the industry and has helped thousands of self-directed investors take control of their retirement future. CEO Jeff Nabers was instrumental in the development of the Solo 401k, meeting regularly with IRS and Dept of Labor lawmakers during and after the passing of the Pension Protection Act of 2006 which brought the Solo 401k into being.

Because this 401(k) plan only includes you (and possibly your spouse, since the IRS considers spouses to be one taxpayer), you are allowed to be your own custodian and administrator. The IRS even has a page on their website describing the Solo 401k. This can be helpful for CPAs to use for education.

Solo 401k Contribution Limits for your CPA

Contribution limits for the Solo 401k are much higher than other common retirement plans. The 2019 maximum contribution for the Solo 401k is 56,000 for those 49 age and younger. For those age 50 and older the maximum contribution is $62,000.

This is broken up into two different types of contributions:

Employee contributions are limited to $19,000 if under age 50. If age 50 or above, you can also include $6,000 in catch up contributions. This limit applies across all 401(k) plans that you participate in.

Take Josiah for example. He’s age 40 and in an employer-sponsored 401k plan for an employer who gives him a W-2. He contributes $5,000 in 2019, which means the maximum he can contribute to his Solo 401(k) as an employee is $14,000.

Employer (profit sharing) contributions may be up to 20-25% of your net compensation based on the structure of your business, until you reach the maximum $56,000 contribution amount (or $62,000 if age 50 or older).

So while Josiah may only be able to contribute $14,000 in employee contributions, he’ll be able to contribute up to $42,000, depending on his net compensation.

Our Solo 401k calculator is an extremely useful tool in determining how much you may be able to contribute.

Hint: Click on “View Report” to share the full details with your CPA so he/she can help you determine the exact amount you’ll be able to contribute, both as employee and employer.

Important Forms & Tax Filing:

The Solo 401k doesn’t file its own tax return. However, there are a few forms you’ll want to be aware of:

Contributions on Form 1040:

If you’ve made any contributions to the plan, you’ll report your contributions to the plan on your personal tax return. For most clients, this is reported on line 28 of IRS form 1040.

All Nabers Group clients are provided with a contribution form that they should fill out to document each contribution they make to the plan. This will make it much easier for you to keep track of contributions and report them at the end of the year!

Form 1099:

If any of the below situations apply to you, you may be required to file a 1099-R:

  • In-plan Roth conversion
  • Rollover from the Solo 401k to an IRA annuity
  • Required Minimum Distribution
  • Early withdrawal from the 401k
  • Regular distribution from the 401k
  • Rollover from the 401k to an IRA or other retirement plan

You should work with your CPA if any of the above situations apply to you, to ensure the 1099 is completely accurately and completely.

All Nabers Group clients will receive reminders each year a few months before the filing is due.

Form 5500-EZ:

If you reach $250,000 or more in plan assets within your Solo 401k, you should file form 5500-EZ.

All Nabers Group clients will receive reminders each year a few months before the filing is due.  Updated guide and instructions that can be shared with your CPA can be found here.

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