If you’re self-employed (or potentially self-employed), you should know about a unique retirement savings opportunity: the Solo 401k (also known as a One-Participant 401k plan or Individual 401k). In fact, the benefits of this savings vehicle are so great that it might be worth starting your own business.
Quick facts about Solo 401k
Qualifications
There are no age or income restrictions, other than requiring that you have income verified by your tax records.
The key is that you must be an employer with no employees, unless you employ your spouse as an employee. (And it might be worth employing your spouse to boost your contributions, see below.)
Limitations on large donations
A participant’s total contributions to the account, including catch-up contributions for people over age 50, cannot exceed $76,500 in 2024. For people under age 50, total contributions cannot exceed $69,000.
The Solo 401k is attractive because the contribution limits are so high. As an employer or employee.
Note: HiringUh huh? Contributions can be either pre-tax or after-tax (Roth). There are after-tax, non-Roth options, but these are very rare and of limited usefulness.Uh huh? Donations are made pre-tax.
Don’t forget your spouse
In 2024, if your spouse works for your company, you can contribute up to $23,000 or 100% of your salary, whichever is less, to your Solo 401(k) as an employee. This is the same amount you can contribute as a full-time employee. If your spouse is over 50, you can also make a catch-up contribution of $7,500, bringing your total employee contributions to $30,500.
That means there’s a lot to contribute.
Also, contributing to a Solo 401k doesn’t prevent you from contributing to other retirement plans, such as an IRA, and as long as you have enough income, you can make the maximum contribution there as well.
It’s a great way to save money and get it back later.
A Solo 401k allows you to make larger contributions towards your retirement savings, plus you can contribute to a Roth account.
Matt is ecstatic about his solo 401k. He says, “I wish I could have done a Roth sooner, but I always had financial constraints that prevented me from doing so. That meant I couldn’t do a Roth above a certain income level, and my 401k plan didn’t offer one. Or maybe it did and I just didn’t know about it. In fact, I joined a 401k plan quite late, since I worked mostly for small businesses. But now that I’m “retired” with a part-time job, I discovered the idea of a solo Roth 401k. It’s incredible!”
Huge tax benefits
You get all the benefits of a regular 401k or IRA (or a regular Roth IRA for employee contributions), but even more so with expanded contribution limits.
Depending on the type of account you use, you can enjoy tax benefits such as:
- Adjusted Gross Income (AGI) Minimum Limit
- Tax-deferred contributions and tax-free earnings growth
- Tax deduction for plan expenses
Inspiration to start your own business
Did you know that most successful entrepreneurs start their businesses after the age of 50? The knowledge they gain over the years gives them the skills to start their own business.
For more details, please see below.
12 great benefits of a solo 401k
1. Pro: Running your own business is rewarding.
2. Pros and cons: You need to run your own business and make enough money to cover your living expenses (if necessary) and your Solo 401k investments.
3. Advantages: The high contribution limits allow you to quickly make up for lost time, which can be very useful if you haven’t been able to save as quickly or as much as you would have liked.
4. Pros: There are many tax benefits available, making it a great deal.
5. Pro: If you don’t actually need much of the income you make from self-employment, you can make up for lost time in the early days pretty quickly.
6. Pro: The Roth option is possible, which can be very appealing for people who want to save in a Roth account because they think their tax rates will rise in the future, but can’t do so because of their high income.
Note: Only employers can contribute to Roth plans.Uh huh? Contribution, not employmentUh huh?.
7. Pro: Setup is relatively easy.
8. Pro: Flexible investment options.
9. Pro: A Solo 401k allows you to borrow up to $50,000 or 50% of your account balance, whichever is less, at a low interest rate. The loan can be used for any purpose.
10. Pro: You control your account. There is no need for an “administrator” to manage your account.
11. Pro: The plans are easy to navigate and there are usually no hidden fees.
12. Pro: A Solo 401k allows you to invest in real estate without paying Unrelated Business Taxable Income (UBTI), which is expensive. Note that there are certain limitations on the management of real estate held in the account.
Disadvantages of Solo 401k
There isn’t much bad to say about the Solo 401k.
1. Disadvantages: After you deposit $250,000 into the plan, there will be additional paperwork required with the IRS.
2. Disadvantages: Running your own business can be difficult.
3. Disadvantages: You can only contribute self-employed income.
How to open a solo 401k
Although you need an employer identification number and income verified by the IRS, a solo 401k is easy to open, and most online brokers offer it.
- Obtain your employer identification number. IRS.
- Contact your broker: Vanguard, Schwab, Fidelity, Etrade, etc.
- Complete the plan onboarding agreement and account application.
- Contribute funds. (Employee contributions must be made by the end of the year, but employer profit-sharing contributions can be made up until the tax filing deadline for that year.)
- Invest your funds in almost any investment offered by the broker.
- If your plan is worth more than $250,000, you’ll need to fill out IRS Form 5500-SF.
How will a Solo 401k impact your future wealth and security?
Imagine what thousands or even hundreds of thousands could do to your wealth and security.
In fact, don’t just imagine it, find out. Use the NewRetirement Planner to model possible contributions to your Solo 401k (and your working income). See the financial impact over your lifetime.
