A solo 401k plan is quite popular among people looking for retirement savings, especially for self-employed individuals or entrepreneurs. Then, several of these plans aren’t professionally managed to result in hefty penalties or termination of the plan. According to an article published in CNBC, there are also limitations to the amount you would like to set aside every year in a 401k plan. Therefore, when you are in a solo 401k, it is essential to maintain it appropriately to avoid charges and annulments.
In this article, you will learn how to make your solo 401k compliant to avoid complications. Read to learn more.
Table of Contents
Make your plan up-to-date
When it comes to the IRA, every 401k plan including solo 401ks must be modified one time in six years. So, if your plan is more than six years old without restating or embracing changes, the plan isn’t compliant. When there will be an audit, your solo 401k will attract heavy fines and probably plan cessation.
When your plan is old, all you need to do is restate the same to ensure it is compliant with existing law. Usually, the majority of plan documents should be updated every 2-3 years because the laws impacting the 401k plan documents keep changing.
Report contributions and transfers
If you did transfer funds from another 401k or an IRA to a solo 401k, you must report that rollover to the other retirement account. As long as you continue doing this, the organization transferring the amount will provide a 1099-R to you, however, will incorporate a code on the 1099-R to show that money was rolled over to the other retirement account, as well as the amount on the 1099-R is tax-free.
When you made new contributions last year, make sure you know about the 2021 contribution limits. All new contributions must be aptly monitored on your business and personal tax returns. When you own a sole proprietor business, all your contributions would usually be displayed on your personal 1040 and on line 28.
Plans to be segregated by source as well as a contributor
You need to maintain different bank accounts for different contributors’ funds implying partners in a solo 401k or spouses. You should also segregate the amount from the Roth funds. Additionally, you should appropriately keep track of as well as record investments from various sources of funds. This is essential because the returns to your solo 401k should be aptly credited to the suitable investment account.
Are you complying with the rules every year as mentioned above? If not, do so now without further ado. If your plan is old, consult with an attorney right away to update your solo 401k plan. If you fail to file form 5500 will attract a fine of $25 per day and a maximum fee of $15,000 for each return not correctly filed. Avoid being plagued by such penalties or charges. File a simple form to avoid non-compliance instead. Your objective is to invest in retirement accounts and live a comfortable life, and not run into trouble.