Advantages of a Solo 401(k) Plan
Author: Siân Killingsworth / 14 Feb 2023 / 401(k) Plan Information, Personal Finance
Sole proprietor 401(k). 401(k) for freelancers. Solo-K. No matter what you call it, if you’re self-employed and looking to save for retirement, a one-participant plan could be right for you.
For over 30 years, solo 401(k) plans have given small business owners with no employees the chance to save for the future while also providing tax credits, much like an employer-sponsored plan. The biggest benefit of having a solo 401(k) retirement plan is that you get all the savings power of a traditional 401(k) plus all the tax credits and loan options.
Many freelancers and solopreneurs choose to open an IRA as their primary retirement savings vehicle, but that type of plan only permits you to put away $6,500 for the entire year in 2023, plus a catch up contribution of just $1,000 if you are age 50 or older.
That might not seem too shabby until you compare that with a 401(k) plan. With a solo 401(k) plan, you can save up to three times that amount! The contribution limit for a 401(k) plan in 2023 is $22,500, plus another $7,500 if you are age 50 or older. And don’t worry – there is no minimum contribution amount, so you won’t face any penalties if you can’t save that much.
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Tax advantages of a solo 401(k)
You can fund your solo 401(k) in two ways:
- Traditional 401(k): Pre-tax contributions are the most common way to fund. Your contributions will reduce your taxable income, and you won’t pay taxes until you withdraw the money in retirement. You can still contribute post-tax dollars as well.
- Roth 401(k): If you expect your income to be higher in retirement than it is now, a Roth 401(k) may be a choice worth considering. These types of contributions are not deductible, but you will not be required to pay taxes on withdrawals or interest on this money after you retire.
A solo 401(k) plan has many features that make it attractive to business owners, including:
- You can invest in almost anything (stocks, bonds, mutual funds) as long as they pass specific screening requirements set by the IRS This means that your investment options are wide open.
- No annual filing requirements: Most other types of plans require annual reporting with the IRS; however, there are no annual filing requirements for solo 401(k)s if the total plan balance is $250,000 or less.
Choose to manage your investments – or not
As a solo 401(k) owner, you can select a self-managed plan that allows you to make decisions about where to invest your money—but you don’t have to. Some of your investment options will be:
- Mutual Funds
- …And more
And can tailor them to fit your savings goals and risk tolerance.
Less fees? Yes please!
A solo 401(k) plan from Ubiquity — we offer two: the Single(k) and the Single(k) Plus — has lower fees than most plans our competitors offer. You’ll see this play out in a couple of key ways:
- No minimum balance requirements: This means that you can start saving right away.
- Low, flat fees1: When you choose a Ubiquity Single(k), we never charge assets under management fees, which are a percentage of your balance. We only charge a flat monthly fee. That means when your savings increase, your fee won’t. You’ll pay the same monthly fee whether you have $5,000 or $5,000,000 in your retirement account.
Is a solo 401(k) the right retirement choice for you? Freelancers, self-employed individuals (and those who employ their spouses), and entrepreneurs who want to save for the future—and support their small business now with lower fees, tax breaks, and less paperwork. That’s what we call a win-win-win.
1 Flat fees are charged by Decimal, Inc. for recordkeeping and administrative services. Third-party service providers may assess asset-based fees to customers. Plan Sponsors are advised to review all service agreements with providers (e.g., investment advisors, custodians, broker-dealers) to evaluate total plan costs.
Ubiquity is not a registered investment advisor and no portion of the material herein should be construed as legal or tax advice. Please consult with your financial planner, attorney and/or tax advisor for advice.