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What is a Solo 401(k)? Self Employed Retirement Plans

What is a Solo 401(k)? Self Employed Retirement Plans

August 30, 2023

Are you a self-employed individual seeking to secure a prosperous retirement? Look no further than the Solo 401(k) plan.

What is a Solo 401(k)?

A Solo 401(k), also known as an Individual 401(k) or a One-Participant 401(k), is a retirement savings plan designed specifically for self-employed individuals and small business owners without full-time employees, except for a spouse. It offers a powerful and flexible way to save for retirement, combining the features of a traditional 401(k) and a Simplified Employee Pension (SEP) IRA.

With a Solo 401(k), you have the ability to make contributions as both an employee and an employer, maximizing your retirement savings potential. As an employee, you can make elective deferrals, contributing a portion of your compensation up to the annual contribution limits set by the IRS. As an employer, you can make additional contributions based on a percentage of your net self-employment income, with certain limitations. These generous contribution limits allow self-employed individuals to accelerate their retirement savings and potentially build a more substantial nest egg.

One of the key advantages of a Solo 401(k) is its exceptional contribution limits. As of 2023, you can contribute up to $19,500 as an employee, with an additional catch-up contribution of $6,500 available if you are aged 50 or older. On the employer side, you can contribute up to 25% of your net self-employment income, capped at a maximum of $58,000. These higher contribution limits allow you to turbocharge your retirement savings, especially for those with higher income levels. Additionally, Solo 401(k) plans offer powerful tax advantages, as contributions are typically tax-deductible, and the investment earnings grow on a tax-deferred basis until retirement.

Eligibility Requirements

To qualify for a Solo 401(k) plan, you must meet certain eligibility criteria. You must be self-employed or a small business owner with no full-time employees, except for a spouse. However, part-time employees who work less than 1,000 hours per year may be excluded from the plan.

Key Features

  1. Higher Contribution Limits: With a Solo 401(k), you have the potential to contribute more towards your retirement savings compared to other retirement plans. As an employee, you can contribute up to $22,500 in 2023, plus an additional $7,500 catch-up contribution if you're 50 or older. On the employer side, you can contribute up to 25% of your net self-employment income, up to a maximum of $66,000.

  2. Tax Advantages: Contributions to a Solo 401(k) are tax-deductible, meaning you can reduce your taxable income for the current year. Additionally, your investment earnings grow on a tax-deferred basis until you withdraw them during retirement, potentially resulting in significant tax savings over time.

  3. Roth Option: Some Solo 401(k) plans also offer a Roth component. With a Roth Solo 401(k), you make after-tax contributions, but your qualified distributions during retirement are tax-free. This option can provide valuable tax diversification, potentially reducing your tax liability in retirement.

  4. Loan Provision: In times of financial need, a Solo 401(k) allows you to borrow against your retirement funds. This feature provides a convenient and relatively low-cost borrowing option, as you're essentially borrowing from yourself. It can serve as a safety net, providing access to capital without early withdrawal penalties or credit checks.

Take Action Today

Now that you are familiar with the exceptional benefits of a Solo 401(k) plan, it's time to take action and secure your financial future. Our team of experienced financial advisors is here to guide you through the process, tailor the plan to your unique circumstances, and help you make the most of this powerful retirement savings tool.

To learn more about how you may benefit, schedule a call using this link´╗┐