If you’re a solo attorney, you may think you don’t have access to a 401(k) plan. Think again – the Internal Revenue Service (“IRS”) allows you to set up a tax-advantaged retirement savings plan known as a solo 401(k).
Key points
- If you’re self-employed and don’t employ others, you’re eligible to open a solo 401(k).
- If your spouse is also employed by your firm, your spouse can also contribute money to your solo 401(k).
- You can contribute money to your solo 401(k) as both an employer and employee (for example, you can match your personal contributions or provide profit sharing with firm profits).
- A solo 401(k) allows you save on either a pre-tax basis, a Roth after-tax basis, or both.
Eligibility Requirements
To qualify for a solo 401(k), the income you intend to contribute must be produced by your firm. You should be able to verify this through your tax records. Your firm may be structured as a sole proprietorship, an LLC, a corporation, or a partnership.
How to Set up a Solo 401(k)
You can open a solo 401(k) at many online and traditional brokers, or directly through a financial services provider like the ABA Retirement Funds Program (“Program”). You’ll also need an employer identification number (“EIN”) to get started with the enrollment process. If you don’t have one already, you can apply for an EIN through the IRS. The rest of the documentation you’ll need, such as a plan document, will be provided by the broker or financial services organization you choose to manage your plan.
Traditional or Roth?
When you set up your plan document, it will constitute a written declaration of the type of plan you intend to sponsor and fund. The choices are the same as those given to an employee opening an account at their employer’s 401(k) plan. You can choose a traditional 401(k) – which allows you to save money before taxes are withheld and defer paying taxes on the money and investment earnings until you withdraw the money in retirement. Or, you can choose a Roth 401(k), which allows you to save after taxes are withheld, and owe no taxes on the investment earnings with a qualified withdrawal.
Benefits of a Solo 401(k)
Solo 401(k)s provide some advantages over other types of retirement accounts available to solo practitioners – such as a Simplified Employee Pension (“SEP”) IRA, a Keogh plan, or Savings Incentive Match Plan for Employees (“SIMPLE”) IRA. Generally, these options offer no Roth savings option, and allow you to save less than you could under a solo 401(k). The solo 401(k) is also the only option that lets you contribute as both an employee and an employer, providing the potential for significant tax benefits both to you personally and to your firm as a business. Solo 401(k)s also offer the opportunity to borrow from your account and typically offer more investment funds than are available in other types of plans.
Consider the ABA Retirement Funds Program
Contact us today to learn more about setting up a solo 401(k) plan for your practice, at no out-of-pocket cost to your firm. The Program is a not-for-profit corporation that brings together over 4,000 law firm retirement plans to offer a platform of investments and a service package that is typically available to only the largest of corporate retirement plans. With over $7 billion in assets, the Program leverages its size to offer you some of the largest and best-known financial services providers in the industry.
This information is for educational purposes only; it is not intended to provide legal, tax, or investment advice. All investments are subject to risk. Please consult an independent tax, legal, or financial professional for specific advice about your individual situation. Each business must consider the appropriateness of the investments and plan services offered to its employees.
The ABA Retirement Funds Program is available through the American Bar Association as a member benefit.
Securities offered through Voya Financial Partners, LLC (member SIPC).
Voya Financial Partners is a member of the Voya family of companies (“Voya”). Voya, the American Bar Association, and the ABA Retirement Funds are separate, unaffiliated entities, and not responsible for one another’s products and services.
CN3949807_1026