Isn’t it great working for yourself? You get to set your own schedule, do work that really matters to you, and you have no one to answer to but yourself. Entrepreneurship is both freeing and empowering.
There is one drawback to being self-employed, though. No access to a workplace retirement plan. Your friends may have someone telling them what to do all day, but they probably have a 401(k) where they can save for retirement tax-deferred.
Is there any tax-advantaged way for you to save for retirement as a self-employed person? Yes, there is. The Solo 401(k).
What Is A Solo 401(k)?
A Solo 401(k) plan is just as it sounds, a 401(k) plan designed for people who are on their own. The IRS calls it a one-participant 401(k). Only business owners without employees are eligible and they can cover their spouse (if they earn income from the business) as well as themselves.
As with other 401(k) plans, both traditional and Roth options are available. With a traditional 401(k) plan, contributions are made pre-tax and taxes are paid upon withdrawal. Roth 401(k)s are funded with after-tax dollars, but they grow tax-free.
Solo 401(k) compared to other retirement plans
A Solo 401(k) offers many benefits that other plans available to self-employed people do not. For starters, the ability to have a Roth feature. They are not available for SEP IRAs, profit sharing plans or money purchase plans. Having access to a Roth through a Solo 401(k) is great for those who make too much to be eligible for a Roth IRA or want to save more in a Roth than the low IRA limits allow.
Another great thing about Solo 401(k)s is the high contribution limit. While a SEP IRA allows a contribution of 20% of net self-employment income, the Solo 401(k) allows for an $18,000 employee contribution plus an employer contribution of 25% of income (of up to $270,000). Total contributions are limited to $54,000. Those over 50 can make an additional $6,000 contribution that doesn’t count against the $54,000. These higher contribution limits not only allow you to save more for retirement, they give you larger tax deductions for your business as well.
A final benefit is the fact that 401(k)s can have loan features while SEP IRAs can’t. Having the ability to take out a loan against your Solo 401(k) offers greater flexibility and leeway in the unpredictability of entrepreneurship.
How We Can Help
Does a Solo 401(k) sound like it could be the answer to your retirement saving needs? There are multiple options available to entrepreneurs and an experienced financial professional can help you sort them all out. If you have any questions about Solo 401(k)s or the best options for your unique situation, give us a call at (626) 529-8347 or email Ricky directly at [email protected].
About Haydel, Biel & Associates
Haydel, Biel & Associates, an independent financial advisory firm serving individuals and families near Pasadena, California. The firm was founded in 2004 by Chris Haydel and Ricky Biel with a desire to provide unbiased, client-centered, community-based financial advice. Together, they have built a practice that has grown into a family of caring, smart professionals committed to blending proven investment methodologies with creative financial technologies that make it easier than ever to accomplish your goals. They strive to keep things simple and fun to give their clients peace of mind and alleviate financial stress. HBA Wealth takes care of their clients’ needs first and foremost and goes the extra mile to make their clients’ finances grow. To meet and see how the HBA Wealth team may be able to help, contact them today at (626) 529-8347 or email Ricky directly at [email protected].