The important numbers to know for 401(k) plan owners

401(k) plans offer a great amount of control and administrative ease for the owner. However there is also the expectation that the owner must keep the 401(k) up to date on regulations. These are the important numbers to know.

|
LM Otero/AP/File
In this Sept. 24, 2013 photo, freshly-cut stacks of $100 bills make their way down the line at the Bureau of Engraving and Printing Western Currency Facility

The Solo 401(k) is a unique retirement plan structure in which the plan participant wears many hats. The plan is designed for self-employed individuals or small-business owners without any other full-time employees. The business owner is both the employer and also the only employee who qualifies to participate in the plan (although the owner’s spouse may also be able to participate). In a self-directed Solo 401(k), the plan owner is also the trustee and the plan administrator.

Because of this structure, the plan owner can enjoy great control and flexibility. However, it also comes with certain responsibilities. Solo 401(k) plan owners are responsible for keeping their plan in compliance with regulations. Here are some important numbers that plan owners need to keep in mind.

$250,000: Balance that triggers tax-filing requirement

Compared with a traditional 401(k) plan, a Solo 401(k) requires much less administrative effort. Plan owners are responsible for keeping records of all transactions. Typically, a Solo 401(k) plan owner is not required to file a tax return for the plan. However, this changes when the assets in the plan exceed $250,000.

If the total value of a Solo 401(k) plan exceeds $250,000 at any time during a tax year, the plan administrator must file a return for the Solo 401(k) for that year. The good news is that filing isn’t very complicated. A Solo 401(k) plan administrator can simply file Form 5500-EZ with the IRS.

$50,000: Maximum that Solo 401(k) plan owners can borrow

A Solo 401(k) owner can borrow money from the plan at any time, for any reason. There is no complicated loan application process, and the interest rate on 401(k) loans is usually lower than for bank loans.

However, plan owners can borrow a maximum of $50,000 or 50% of their total account balance, whichever is less. The loan must also be repaid within five years. Plan owners must be aware of the loan limit and stay on top of their repayment schedule. If you fail to repay the loan properly, the loan may be treated as a withdrawal from the plan, and taxes and penalties may apply.

10%: Penalty rate for early withdrawal

Even though the Solo 401(k) is unique in many ways, it is still a “qualified” retirement plan under the tax code. Like other qualified plans, a Solo 401(k) is intended only for use as retirement savings. To discourage early withdrawal, there’s a 10% penalty on money taken out before age 59½, on top of the taxes due on the withdrawal. This is why most plan owners should to consider a Solo 401(k) early withdrawal only as a last resort. Withdrawals after age 59½ are still taxed, but there’s no additional penalty.

You've read  of  free articles. Subscribe to continue.
Real news can be honest, hopeful, credible, constructive.
What is the Monitor difference? Tackling the tough headlines – with humanity. Listening to sources – with respect. Seeing the story that others are missing by reporting what so often gets overlooked: the values that connect us. That’s Monitor reporting – news that changes how you see the world.

Dear Reader,

About a year ago, I happened upon this statement about the Monitor in the Harvard Business Review – under the charming heading of “do things that don’t interest you”:

“Many things that end up” being meaningful, writes social scientist Joseph Grenny, “have come from conference workshops, articles, or online videos that began as a chore and ended with an insight. My work in Kenya, for example, was heavily influenced by a Christian Science Monitor article I had forced myself to read 10 years earlier. Sometimes, we call things ‘boring’ simply because they lie outside the box we are currently in.”

If you were to come up with a punchline to a joke about the Monitor, that would probably be it. We’re seen as being global, fair, insightful, and perhaps a bit too earnest. We’re the bran muffin of journalism.

But you know what? We change lives. And I’m going to argue that we change lives precisely because we force open that too-small box that most human beings think they live in.

The Monitor is a peculiar little publication that’s hard for the world to figure out. We’re run by a church, but we’re not only for church members and we’re not about converting people. We’re known as being fair even as the world becomes as polarized as at any time since the newspaper’s founding in 1908.

We have a mission beyond circulation, we want to bridge divides. We’re about kicking down the door of thought everywhere and saying, “You are bigger and more capable than you realize. And we can prove it.”

If you’re looking for bran muffin journalism, you can subscribe to the Monitor for $15. You’ll get the Monitor Weekly magazine, the Monitor Daily email, and unlimited access to CSMonitor.com.

QR Code to The important numbers to know for 401(k) plan owners
Read this article in
https://www.csmonitor.com/Business/Saving-Money/2015/0824/The-important-numbers-to-know-for-401-k-plan-owners
QR Code to Subscription page
Start your subscription today
https://www.csmonitor.com/subscribe