Solo 401(k) Plan Benefits: Tax Savings + More 

Author: Siân Killingsworth / 4 Feb 2023 / 401(k) Plan Information, Personal Finance

Although being your own boss is great in many ways, one glaring drawback is the lack of a group retirement plan. However, there are savings instruments available that can help you meet your retirement goals even if you are self-employed. One of the best ways to prepare for your future is via a solo 401(k). This type of 401(k) plan goes by different names, including Single(k)®, self-employed 401(k), individual 401(k), or one-participant 401(k).

What Is a Solo 401(k)?

A solo 401(k) is a type of retirement plan that allows self-employed individuals and small businesses with no employees to save for retirement. Ther are some similarities:

• Contributions are made pre-tax, reducing your taxable income for the year
• If you have an IRA already set up, rolling over into a solo 401(k) will allow you to combine all of your retirement accounts into one place and manage them through one platform–which makes managing taxes easier!

And there are some notable differences from a traditional 401(k):

• To be eligible, you must be a business owner with no employees (except a spouse)
• Non-discrimination and top heavy testing do not apply AND do not require an annual 5500 filing unless you have a balance more than $250,000 (or terminate the plan)

Solo 401(k) Plan Benefits

Perhaps the best benefit is that as the business owner, you can make contributions to your retirement account as both the participant and the employer – up to a total of $66,000 in 2023, or up to $73,500 if you are age 50 or older. This is a significant amount of savings each year and can help you build your nest egg fast. But there are many other solo 401(k) plan benefits that make opening a plan worthwhile:

• Option to take a loan from retirement savings
• Higher contributions limits than Individual Retirement Accounts (IRAs)
• Plan administration is extremely low maintenance
• No nondiscrimination tests
• Business owners are not required to file annual reports with the IRS until the plan reaches $250,000 in assets.

If your spouse also earns income from your business they can participate in the plan as well, effectively doubling your annual retirement savings. They may contribute to their plan pre-tax up to the IRS limits, and as the employer you can contribute up to 25% of their annual compensation.

Don’t forget about solo 401(k) tax savings. These are some of the most compelling benefits for many sole proprietors:

• Reduced taxable income for pre-tax salary contributions
• Ability to make after-tax Roth contributions
• Business tax deduction for plan contributions and plan expenses
• Pre-tax growth on investments while in the plan

Setting up a Solo 401(k)

If you have an employer identification number, you can open a solo 401(k). To set up a new solo 401(k), the plan adoption agreement must be signed by December 31 to make contributions for that year. All contributions must be made by the business’s federal income tax return due date, including extensions.

Here are additional resources to help you determine whether to open a solo 401(k) plan:

Why Have a Small Business Retirement Plan?

How to Start a 401(k) for Your Small Business

2023 Retirement Contribution Limits