What Is a QRP (Qualified Retirement Plan)?

A Qualified Retirement Plan (QRP) most commonly refers to an Individual or Solo 401(k) for self-employed individuals and small business owners. These plans are designed for those with no full-time employees other than the owner or a spouse. A QRP offers substantial tax advantages and higher contribution limits compared to other personal retirement accounts. It allows eligible individuals to invest a significant portion of their business income toward their future financial security.

Understanding the QRP

A Solo 401(k) combines two distinct contribution components: an employee deferral and an employer profit-sharing contribution. This dual structure permits significantly higher savings potential. Individuals eligible to establish a Solo 401(k) include self-employed professionals, independent contractors, and business owners who do not employ common-law employees, with the exception of a spouse who also works for the business.

This QRP offers several advantages, including substantially higher contribution limits compared to traditional or Roth Individual Retirement Arrangements (IRAs). Participants can choose to make contributions on a pre-tax (traditional) basis, which reduces current taxable income, or on an after-tax (Roth) basis, allowing for tax-free withdrawals in retirement. The plan also permits participants to take loans from their vested account balance, providing access to funds for various needs under specific IRS rules.

Contribution and Investment Rules

Contributions to a Solo 401(k) are made as an employee and as an employer. For 2024, the employee contribution, known as an elective deferral, can be up to $23,000. Individuals aged 50 and older can make an additional catch-up contribution of $7,500, increasing their employee deferral limit to $30,500. This employee contribution is based on net self-employment income.

The employer contribution is a profit-sharing contribution, which can be up to 25% of the participant’s compensation. For self-employed individuals, compensation is specifically defined for retirement plan purposes and often equates to 20% of net self-employment income after deducting one-half of self-employment taxes and the employer’s contribution. The combined total of both employee and employer contributions cannot exceed $69,000 for 2024, excluding catch-up contributions. The maximum compensation that can be considered for contribution calculations is $345,000 for 2024.

For example, a self-employed individual under age 50 with $100,000 in net self-employment income could contribute $23,000 as an employee. As the employer, they could contribute an additional 20% of their adjusted net self-employment income, which would be $20,000. This results in a total contribution of $43,000. Solo 401(k)s offer a broad range of investment options, including stocks, bonds, mutual funds, and exchange-traded funds (ETFs).

Establishing a QRP

Establishing a Solo 401(k) involves several procedural steps to ensure compliance with Internal Revenue Service (IRS) regulations. The first step involves selecting a plan provider that offers comprehensive support, including the necessary plan documents and ongoing administration.

The QRP requires formal plan documents, such as a plan adoption agreement and a trust agreement, which outline the rules for contributions, distributions, and investments. These documents are provided by the chosen plan administrator and must be properly executed. The plan requires its own Employer Identification Number (EIN), separate from the individual’s personal or business EIN. This EIN is essential for the plan’s legal operation and for opening its investment accounts.

Once the EIN is secured, the next step is to open the investment account or accounts under the QRP’s EIN. These accounts will hold the plan’s assets and facilitate the investment of contributions. The process ensures that the retirement funds are held in a legally compliant structure, distinct from personal assets, and are subject to the specific rules governing qualified retirement plans.

Ongoing Compliance and Administration

Maintaining a Solo 401(k) requires adherence to annual compliance and administrative requirements. Contributions must be made by certain deadlines; employee elective deferrals are generally due by December 31st of the plan year, while employer profit-sharing contributions can be made up to the individual’s tax filing deadline, including extensions. Accurate record-keeping of all contributions, investment activities, and distributions is essential for tax reporting and compliance.

An annual informational return, Form 5500-EZ, is generally required if the total assets of the Solo 401(k) plan exceed $250,000 at the end of the prior plan year. This form provides the IRS with information about the plan’s financial condition and operations. The filing deadline for Form 5500-EZ is typically July 31st of the year following the plan year.

Solo 401(k)s permit participants to take loans from their vested account balances, typically up to $50,000 or 50% of the vested balance, whichever is less. These loans must be repaid with interest, generally within five years, or longer for the purchase of a primary residence. Distributions from the plan are typically allowed without penalty once the participant reaches age 59½. Required Minimum Distributions (RMDs) generally begin at age 73, necessitating annual withdrawals to avoid penalties.