Best 401k for the Self-Employed

Author: Siân Killingsworth / 5 Nov 2020 / Business

By the end of 2020, there could be 42 million self-employed Americans – accounting for roughly a third of all working professionals.

One of the potential pitfalls of working for yourself is that you don’t have anyone looking over your shoulder to ensure you save for your retirement. It’s all up to you to figure out on your own. Fortunately, the Solo 401k is an excellent option for self-employed workers to build their future retirement nest egg and save on their tax obligations today.

Solo 401k: The Best 401k for Self-employed Workers

Ubiquity recommends a Solo 401k, whether you’re a self-employed entrepreneur or a business owner with no full-time, regular employees. Here is everything you need to know about this great savings opportunity:

• Who is eligible:

  A self-employed worker or business owner can set up a Solo 401k, so long as there are no “full-time, regular employees.” You can have 1099 freelancers, part-time workers with under 1,000 hours, nonresident aliens, and children under 21 working for you. A spouse working for the business can also participate in your Solo 401k plan to double the household savings amount.

• How much you can save:

  You’re allowed to set aside up to 100% of your income, to a maximum of $57,000, as an “employee” in 2020. A $6,000 catchup contribution is allowed for those over 50. In your capacity as an “employer” (of yourself), you can contribute up to 25% of net self-employment income (net profit – half your self-employment tax + plan contributions you made for yourself). The maximum employer + employee total for 2020 is $285,000. If your spouse is in the plan, you can double this figure. You may also elect not to make any contributions if finances are tight this year.

• Tax advantage:

  A Solo 401k works like any employer-offered 401k with pre-tax contributions. Distributions can be taken without penalty after age 59.5 and must be taken at age 70.5 – at which point taxes are paid on the amounts withdrawn.

Alternatives to the Solo 401k for Self-Employed Workers

Other retirement savings options for self-employed include:

• Traditional or Roth IRAs – ideal for those just starting out to save up to $6,000 a year, plus a $1,000 catchup contribution for over 50. Tax deductions are available for traditional IRAs, whereas Roth IRAs allow for tax-free withdrawals in retirement.
• SEP IRAs – allow up to 25% of self-employment earnings to a maximum of $57,000. This amount can be deducted on a personal tax return. Distributions in retirement are taxed as income. If you have employees, you must contribute an equal percentage of salary for each one.
• SIMPLE IRAs – are good for larger businesses with up to 100 employees, allowing up to $13,500 in 2020, plus a $3,000 catchup contribution. Money put into the account is deductible, but distributions are taxed in retirement. Employee contributions are deductible as a business expense. You may contribute matching contributions up to 3% or fixed contributions of 2%.
• Detailed Benefit Plans – are fit for self-employed individuals with no employees who have a high income and want to maximize savings on an ongoing basis. Also called a pension plan, contribution limits are based on the benefit you’ll receive at retirement, your age, and your expected investment returns. These plans are expensive to administer and require ongoing funding commitments. If you need to stash $50,000 to $80,000 more, it makes sense to pursue a pension – but, otherwise, there are better options.

How to Set Up a Solo 401k

You can open a Solo 401k for your small business quickly and easily online with Ubiquity. Compared to other types of 401k accounts, a Solo 401k is simpler to administer. Some self-employed business owners tackle their own administrative duties – making contributions, keeping records, and filing tax returns and IRS documents. This approach requires organization, financial knowledge, and assumed liability for keeping your books straight. You may need a broker to help orchestrate specific investments unless you take a DIY approach and trade online.

Another option is to hire a Certified Public Accountant. These professionals charge, on average, over $450 just to help you prepare the annual Form 1040 with Schedule C.

At $18/month, hiring Ubiquity to oversee your plan administration provides much more value for your money. We’ll file your plan documents, inform you of new plan tax credits, and keep up with Form 5500 every year once your account balance exceeds $250,000.

We can automate deductions for you if you wish, keep detailed records of your contributions, monitor your account to make sure that you aren’t depositing too much, facilitate loans, and pay out distributions. Our administration is available for a low flat monthly rate. Connect with a Ubiquity retirement expert to get started.