Start saving the self employed way with Ubiquity's easy, affordable solo 401(k) plan.
Start saving the self employed way with Ubiquity's easy, affordable Single(k) plan.Connect with a retirement expert
Self-employment is great for visionary, freedom-seeking entrepreneurs.
However, the dream has its drawbacks. Those who go it alone assume the entirety of the risk, the workload, and the tax obligation as both the employer and the employee. Plus, they don’t have the luxury of an employer-sponsored retirement plan to soften the blow at tax-time.
Opening a Solo 401(k) effectively solves this problem for those who qualify. With the right provider, solo business owners can start reaping immediate tax benefits, saving for the future, and enjoying greater financial flexibility at an affordable cost.
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:
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.
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.
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.
With a Solo 401(k), you contribute as both “employee” and “employer.” In 2020:
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 $19,500 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.
To get started, you’ll need to:
Owner-only businesses need a 401(k) provider that can meet their needs. Consider the following:
Fit Small Business named Ubiquity one of the 10 “Best Solo 401(k) Providers,” particularly for individuals who like the freedom to choose their own brokerage firm. Since our founding in 1999, we have helped more than 100,000 people invest more than $2 billion in retirement savings accounts.
Ubiquity creates the plan, facilitates contributions, provides customer service, administers loans if necessary, and offers tax form assistance for an additional fee. The price for our simple, flexible Single(k) plan is easily established online and is very affordable to manage.