Unlocking the New Secure 2.0 Tax Credit for Solo 401(k) Plans

If you’re self-employed or run a small business, retirement planning just got a lot more rewarding. Under current IRS rules, employers that adopt an automatic enrollment feature in their retirement plans can qualify for valuable tax credits, and Solo 401(k) owners are now included in this incentive. This powerful planning strategy not only boosts retirement savings but directly lowers your tax burden. (irs.gov)

In this blog post, we’ll break down what you need to know about this credit, how it works for self-directed Solo 401(k) plans and SIMPLE IRA plans, and why working with your CPA or tax preparer is a smart move.

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‍What the IRS Says About Automatic Enrollment

The IRS recognizes the value of automatic enrollment, a feature that positions employees (or you, in a Solo 401(k) situation) into retirement contributions unless they opt out, because it increases participation and helps people save for retirement.

According to the IRS: ‍

Automatic enrollment allows an employer to automatically deduct elective deferrals from an employee’s wages unless the employee makes an election not to contribute or to contribute a different amount.

This feature is available to any plan that permits elective salary deferrals, including 401(k)s and SIMPLE IRA plans. ‍

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The Tax Credit: Up to $1,500 for Solo 401(k) Owners

Here’s the exciting part: if you adopt an Eligible Automatic Contribution Arrangement (EACA), essentially a formal automatic enrollment structure, in your Solo 401(k) plan, you may qualify for a tax credit of $500 per year for up to three years. That’s up to $1,500 in tax credits. ‍

Key points:

• Credits are available in each of three years that your plan includes the automatic enrollment feature.
• Total potential credit is $1,500.
• This credit directly reduces your tax liability, unlike a deduction which only reduces taxable income.

This tax credit was expanded under retirement law changes (SECURE 2.0) to encourage broader adoption of automatic enrollment. That includes Solo 401(k) plans even though traditional startup credits often don’t apply to solo plans. ‍

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Solo 401(k) and Self-Directed Plans: Why This Matters ‍

A Solo 401(k), also called an Individual 401(k), is designed for business owners with no full-time employees other than a spouse. This structure allows you to contribute both as the employer and employee, providing higher potential annual savings than some other retirement plans.

When this plan includes:

• Automatic enrollment provisions (EACA): you can claim the credit.
• Self-directed investment options: you can invest in a broader array of assets like real estate, private placements, cryptocurrency, notes, and so much more.

When pairing self-direction with the automatic enrollment tax credit, you’re combining saving incentives with greater control over your retirement portfolio. ‍

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SIMPLE IRA Plans and Tax Credits

While Solo 401(k) plans are grabbing headlines, SIMPLE IRA plans, another option for small business owners, also allow the use of automatic enrollment and may be structured to benefit from similar credits, provided they meet IRS criteria for automatic contribution features.  

Your CPA or tax advisor can help evaluate whether a SIMPLE IRA with auto-enrollment fits your personal and business goals. ‍

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How to Claim the Credit

To take advantage of automatic enrollment credit:

1. Confirm your plan includes an EACA (automatic enrollment feature).
2. File IRS Form 8881 (Credit for Small Employer Pension Plan Startup Costs and Auto-Enrollment) with your business tax return.
3. Track the $500 annual credit for each of the first three eligible years. IRS

Because IRS rules can be nuanced, be sure to coordinate with your CPA or professional tax preparer. ‍

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Work With Your CPA or Tax Professional

Adding automatic enrollment and claiming tax credits isn’t a “set it and forget it” task. Your CPA or tax preparer can:

• Evaluate whether your Solo 401(k) or SIMPLE IRA plan qualifies.
• Ensure your plan documents reflect the necessary EACA language.
• Help you complete the required tax forms accurately.
• Maximize your retirement plan tax strategy each year.

A professional can also review other tax incentives you may qualify for — like the Saver’s Credit, or can guide you on contribution limits and timing. ‍

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Bottom Line

If you’re a solopreneur or small business owner:

• Take a close look at adding automatic enrollment to your Solo 401(k).
• This strategy could deliver up to $1,500 in tax credits over three years.
• Work with your CPA or tax preparer to ensure accurate implementation and compliance.

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For more details on automatic enrollment features in retirement plans, see the official IRS guidance:

https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-automatic-enrollment ‍

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Ready to take more control of your retirement?  

Mountain West IRA can help you open a Self-Directed IRA or Solo 401(k), so you can invest in what you know best.  

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