Solo 401(k) Provider

If you are a sole proprietor, freelancer, independent contractor, side-job worker, or solo entrepreneur, a Solo 401(k) is the ideal choice for retirement savings for the following reasons:

1. Huge Tax Deduction

Solo 401(k)s (and SEP IRAs) offer the highest maximum contribution limits compared to other self-employed retirement plans. If you have no plans to add employees to your business, then a Solo 401(k) makes sense. (Just keep in mind: if you’re taking out a Solo 401(k) for contract work done on the side of your regular job, the contribution limits apply per person, not per plan.)

What if you add employees? If you have a Solo 401(k) and add a full-time worker to payroll, you will no longer be able to contribute to your plan; while your account is “frozen,” you can still manage it and allow it to mature. If you do expand and wish to cover your employees, you may consider an alternative such as a SEP IRA, which will enable you to contribute 10% of your earnings, as well as 10% of each eligible employees’ earnings as well. Other options may make more sense, depending on your expansion needs.

2. No Taxes Now

You can opt for a “Traditional” Solo 401(k) during setup, meaning that you defer the taxes you pay at withdrawal time. In other words, the traditional solo model allows you to deduct a percentage of your taxable income for the year to reduce your tax burden. Or you may opt for a “Roth” Solo 401(k), which allows you to claim the lesser of your retirement contributions or 25% of your net self-employment earnings. If you’re worried about the tax rate climb in the future cutting into your retirement dollars, opt to pay your share of the taxes now.

3. Loan Flexibility

Generally speaking, it’s best to allow your retirement fund to grow over the years, but in a pinch, the money is available to you. Solo 401(k) account holders can borrow up to 50% of the plan value or $50,000 – whichever is less. This is a great perk for single business owners who may have limited resources available when financial times grow tough.

How does a Solo 401(k) work?

With a Solo 401(k), you contribute as both “employee” and “employer.” In 2021:

• As Employee: You may save the lesser of up to $20,500, or 100% compensation, in employee contributions. If you’re over 50, you can add an additional $6,500 in catch-up contributions.
• As Employer: You can save up to 25% of your net self-employment income in profit-sharing contributions, up to $40,500.
• This means you can contribute up to $61,000

Contributions are generally made on a pre-tax basis. However, some Solo 401(k) providers also offer a Roth 401(k) option that lets you invest some or all contributions on an after-tax basis, so that they are tax-free in retirement. The IRS considers “retirement age” to be 59.5. Any distributions taken out of the account beforehand may be subject to taxes and penalties.

If your spouse earns income from your business, you can effectively double your Solo 401(k) contributions as a family. On the employee side, you can contribute up to $20,500 for your spouse (plus the $6,500 catch-up provision, if eligible). On the employer side, you can make the plan’s profit-sharing contribution up to 25% for your spouse as well.