Simple IRAs & Solo 401(k)’s
A SIMPLE IRA (or Savings Incentive Match Plan for Employees) is a savings incentive plan, which can be established by corporations, partnerships, LLC’s, sole-proprietors, and non-profit organizations. Starting back in 2011, they cannot have more than 100 employees who earned at least $5,000 per calendar year. The employer must include employees who have earned at least $5,000 per calendar year in any 2 preceding years. Non-resident aliens may be excluded from participation (as in an LLC, where you may be a non-resident alien and be considered a valid member in the LLC). Maximum salary reductions in 2020 is $13,500, and if you are age 50 or over, additional “catch-up” salary reductions of $3,000 for these years may also be made (total of $16,500).
This type of plan must be established by October 1 of the current plan year, and are funded through year-end December 31 through payroll deductions by employee and matchings by the employer.
A SOLO 401K is simply a 401K for a single business owner/employee. This one is a “winner”: the costs of establishment and maintenance are low. Elective deferrals up to 100% of your compensation (or earned net income for those self-employed) up to an annual contribution limit of $19,500 in 2020, (or $25,500 in 2020 if age 50 or over); PLUS employer nonelective contributions up to 25% of compensation as defined by the plan, (or for self-employed’s, you must make a special computation to figure the maximum amount of elective deferrals and nonelective contributions you can make for yourself. When figuring the contribution, compensation is your “earned income,” which is defined as net earnings from self-employment after deducting both the one-half of your self-employment tax, and contributions made for yourself). This can result in a maximum of $58,000 for 2020, up to 100% of your compensation.
This type of plan must be established by December 31 (calendar year business) of the current plan year (but can be funded up until March 15th, or the extended due date of September 15th for corporations and LLC’s).
Please contact my office for more information regarding these benefit plans.