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As a freelancer, sole proprietor, independent contractor, or entrepreneur, you can start reducing your taxable income right away with a solo 401(k) plan. Compared to IRAs, this plan allows you to set aside significantly more for retirement. It also permits you to borrow up to $50,000 from the balance and pay yourself back over the course of five years.
You have the best of both worlds with a solo 401(k). You have the flexibility to contribute as much as you want from year-to-year (up to the standard limits), plus, you do not have to worry about limiting their salary deferrals based on failed nondiscrimination tests caused by employees with low savings rates. You also get all the benefits of a big business 401(k), like tax deductions and loans.
Solo 401(k) benefits:
Because there are no employees, plan administration is extremely low maintenance. There are no nondiscrimination tests and business owners are not required to file annual reports with the IRS until the plan reaches $250,000 in assets.
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One of the most important benefits of a self-employed 401(k) is the large amount that can be contributed each year, tax-free.
Salary Deferral Contribution
Up to $23,000 for 2024 ($22,500 in 2023)
For corporations: Up to 25% of income
For the self-employed: Up to 20% of income
Annual Limit Per Participant
Lesser of 100% of salary or $69,000 ($66,000 in 2023)
Catch-Up Contributions (if age 50 or older)
For additional details on contribution limits, click here.
A solo 401(k) plan follows most of the same rules as a regular 401(k) plan, with a few exceptions.Questions? Our experts are here to help
Pre-tax and Roth contributions
You have the option to make either pre-tax or post-tax Roth salary contributions. Pre-tax contributions are not included in income when calculating taxable income for the year. Taxes are paid on these amounts and any investment earnings when the person retires and starts taking distributions from their 401(k) plan. Post-tax Roth contributions are included in taxable income. These amounts are tax-free when distributed from the plan. Any investment earnings on the Roth contributions will also be distributed tax-free if the distribution is qualified.
Although solo 401(k) plans are not intended for businesses with employees, you may want to set eligibility requirements in the plan document in case you add employees at some future date. Care must be taken to not exclude yourself from the plan if selecting eligibility provisions.
Coverage and nondiscrimination tests
Because there are no employees, your plan is exempted from compliance tests designed to ensure that lower-paid employees receive a proportionate share of plan contributions. This simplifies plan operations and lowers administrative costs.
Reporting and disclosures
Solo 401(k) plans are not subject to most of the annual reporting and participant disclosure filing requirements that apply to 401(k) plans covering employees. Once solo 401(k) plan assets reach $250,000 or more, the owners must file a Form 5500-EZ, Annual Return of One-Participant (owners and their spouses) Retirement Plan with the IRS.
1 An evaluation has been conducted by Decimal, Inc. through its research of independent customer reviews on Google, Trustpilot, and the Better Business Bureau as reported by unaffiliated contributors on or before September 30, 2022, with a revaluation date on January 12, 2023, resulting in an updated evaluation, for four similar small-business 401(k) providers in the marketplace.
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