Why Should You Have a Solo 401(K) Plan?

April 19, 2023


One of the 2022 findings suggests that slightly less than 10 million Americans are into self-employment. It means they can use the Solo 401(k). Opening this account is easy, and it has some perks also. If you are a small business owner, freelancer, or independent contractor, you can boost your retirement savings with a Solo 401(k). However, you cannot have a full-time employee in the business. Only your spouse can be an exception.

Ease of opening and customizing an account

You can set up your account with your Employer Identification Number (EIN) in a few steps. If you don’t have this, you can log into the IRS website to apply. It takes a few minutes to get one. Some people like to manage their plans without any external interference. In that case, a self-directed Solo 401(k) online account remains their best bet. You can check a site like solo401k.com. All you have to do is fill-up the form, sign the agreement, and get ready. You can explore investment opportunities in real estate, tax liens, precious metals, and more as soon as you get access. You can customize your account based on your risk-taking abilities and expectations.

Some platforms also allow you to open Solo Roth 401(k). A regular plan requires you to pay tax on withdrawals, while Roth plans come with two choices – pay taxes now on contributions or during money withdrawal.

Tax savings

As mentioned, the regular Solo 401(k) plan doesn’t demand tax payments on contributions. You can pay upon withdrawal. So, how do you save money? Suppose you earn USD$60k through a business that attracts 22% of federal tax. If you transfer USD$20k into your Solo plan, you will be liable to pay tax on only the remaining USD$40k. If you spend about USD$13,200 on USD$60,000 in tax, you pay only about USD$8,800 for USD$40,000. What does it mean? It leaves you with USD$4,400 in savings.

Contribution limits

The IRS considers a business owner an employee and an employer. Due to this, you get an excellent opportunity to maximize your savings with your 401(k). Again, imagine your annual income to be USD $60k. The employee can invest USD$22,500; an employer can invest 25% of revenue annually. That means your contributions can be significantly higher in the account if you combine these two options. If you are married, you can also take the same approach for your spouse. More income will allow you to invest more within the acceptable contribution limit.

One more critical thing you must consider is that your small business may need an urgent cash infusion. You can borrow money from your Solo 401(k) then. It can be around USD$ 50k. Of course, you must repay the amount; but the difference is the money will come to you eventually. Hence, it can be a win-win situation.

You can be busy making your business a success. But retirement planning must not wait. If you keep money aside for your future from now, your retirement lifestyle will feel easy and manageable. Delays or lack of attention in this area can be a costly mistake.

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Andi Perullo de Ledesma

I am Andi Perullo de Ledesma, a Chinese Medicine Doctor and Travel Photojournalist in Charlotte, NC. I am also wife to Lucas and mother to Joaquín. Follow us as we explore life and the world one beautiful adventure at a time.

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