Solo Roth 401k for company with full-time employees

BACKGROUND: I would like to determine if I am eligible to create and maintain a Solo Roth type 401k.

I am a 50% owner in a small corporation for which I work full time. We
offer no retirement benefits at all. We have less than 20 employees who
are generally a class of employees that would not participate in a plan
even if we were to offer it.

I also have a sole proprietorship with no employees that I work part time.

I have a Roth IRA which is fully funded this year but have been unable to
make regular contributions in the past. Consequently at 59 years old and
single I only have $20k in that IRA.

QUESTION: Am I eligible to create and maintain a Solo Roth 401k plan as long as I
keep my sole proprietorship business active? Is there an advantage in
having a Solo 401k rather than saving in a bank savings account or have
stocks/bonds etc?

ANSWER: Based on the information provided, it appears that you do not qualify to open a solo 401k because you own 50% or more of each company (Small Corporation and Sole Proprietorship). Please click here to learn about the Controlled Group Rules. It appears that your situation falls under the following type of controlled group categories:

Type 2: Brother-Sister Controlled Group

To be considered a brother-sister controlled group, the same five or fewer persons must own, in aggregate, at least 80 percent of each of the organizations in the brother-sister controlled group. Also, the same five or fewer persons who meet the controlling interest requirement must have effective control (ownership of more than 50 percent) of each organization.

As you will see, the IRS controlled group rules are complex. As such, pay close attention to them and consult with your company’s accountant to make sure you do not run afoul with the controlled group rules.

However, another option is to open a traditional 401k that includes the Roth designated account (Roth 401k) feature and also allows for investments in alternative investments such as real estate and precious metals. A traditional 401k is a type of retirement plan for companies with common-employees. These employees don’t have to participate in the 401k but at least be give the option to do so. Even if they opt out, the employer may have to share in the profits of the company in the event it elects to make profit-sharing contributions, which is an optional feature.

Regarding the difference between a solo 401k plan and a personal savings account, besides the fact you have to be self-employed with not full-time employees to open a solo 401k, gains in a savings account are subject to capital gains, whereas gains in solo 401k grow tax deferred until distributed at retirement, or tax free in the case of a Roth Solo 401k.

Thanks
Tim in South Dakota