Financial planning tools and services to put you on the path to the future you want
Your guide to financial planning and retirement
Connect with peers and experts
Get to know the people behind the company and the mission behind the work
Offer financial wellness to the people at the heart of your business
September 16, 2021
If you are self-employed (or could be), you should know about a unique retirement savings opportunity: the Solo 401k, also known as the One-Participant 401k plan or the Individual 401k. In fact, the advantages of this savings vehicle are so great, that it may be worthwhile to start your own business.
There are no age or income restrictions, beyond requiring that you have earned income, verified through tax records.
The key is that you must be a business owner with no employees, except for employees who also happen to be your spouse. (And, it may be worthwhile to hire your spouse to increase your contributions. See below.)
Massive contribution limits are what make the Solo 401k so interesting. And, you can make contributions both as the employer and an employee.
Employer Solo 401k contribution limits: As the employer, you can contribute up to 25% of your compensation, not to exceed $58,000 for the 2021 tax year.
Employee Solo 401k contribution limits: As the employee, you can defer 100% of your compensation up to $19,500 (or $26,000 if you are 50 or over) for the 2021 tax year.
NOTE: Employee contributions may be pre-tax or after-tax (Roth). There is also the option for after-tax non-Roth, but this is very rare and has limited utility. All Employer contributions are pre-tax.
Combined Solo 401k contribution limits: The combined amount of employer plus employee contributions can’t exceed $58,000 ($64,500 if 50 or older) for the 2021 tax year.
Combined Contribution Limits with Your Employee Spouse: So, if you own your own business and you employ your spouse, you can contribute up to $116,000 ($129,000 if over 50).
In other words, you can contribute a lot.
And, contributions to a Solo 401k do not prevent you from also contributing to other retirement plans like an IRA. You can still contribute the maximum there too, as long as you have income enough to support it.
–> See the impact of Solo 401k savings: Model contributions (and self-employed work income) in the NewRetirement Planner. Evaluate tax consequences and savings growth on your cash flow and future net worth.
A Solo 401k allows you to make really big contributions to your retirement savings. And, you can even contribute to a Roth account.
Matt is ecstatic about his Solo 401k. He says, “I wish I could have created a Roth earlier, but I have always had financial constraints preventing it — i.e. earnings over a certain amount didn’t allow it, and my 401k plans didn’t offer it — or maybe some did and I never realized it. As it was, I got into 401k plans fairly late since I worked mainly for small companies. But now that I ‘retired’ with a part-time job, I discovered the idea of an Individual (solo) Roth 401k. This is almost too good to be true.”
You get all the benefits you would get from a regular 401k or IRA (or even a regular Roth IRA for employee contributions) — just supersized due to the larger contribution limits.
Depending on the type of accounts you use, tax benefits may include:
Did you know that most successful entrepreneurs started their business after 50? The knowledge you’ve gained over the years give you the skills to go it alone.
Learn more about:
1. Pro: Running your own business is rewarding.
2. Pro and Con: You need to run your own business and make adequate money to fund your life (if necessary) and the Solo 401k investment.
3. Pro: Massive contribution limits enable you to make up any lost time pretty quickly. This is great if you didn’t save as early or as much as you would have liked.
4. Pro: Many tax benefits — supersized.
5. Pro: You can make up lost time pretty quickly for what was missed in the early years, assuming you don’t actually need too much of the earnings from the self-employment to get by.
6. Pro: Roth options are possible. This is massively compelling to people who wanted to save in a Roth account because they think that tax rates will be higher in the future, but could not due to high earnings.
NOTE: You can only contribute to a Roth plan with your employee contributions, not employer.
7. Pro: Relatively simple to set up.
8. Pro: Flexible investment options.
9. Pro: With a Solo 401k you can borrow up to $50,000 or 50% of your account value — whichever is less — at a low interest rate. The loan can be used for any purpose.
10. Pro: You control the account. You do not need a “custodian” to administer the account.
11. Pro: The plans are easy to operate and don’t generally have any hidden fees.
12. Pro: Solo 401ks allow you to invest in real estate without having to pay the Unrelated Business Taxable Income (UBTI). UBTI taxes are high. Note that there are certain restrictions on the management of real estate held within the account.
There is not much bad to say about a Solo 401k.
1. Con: Some additional paperwork with the IRS after you have $250,000 in the plan.
2. Con: Running your own business can be hard.
3. Con: You can only contribute self-employement earned income.
You need an Employer Identification Number and earned income verified by the IRS, but a solo 401k is easy to open. They are offered by most online brokers.
Just imagine what extra thousands or hundreds of thousands will do to your wealth and security!
Actually, don’t imagine it, find out. Use the NewRetirement Planner to model possible contributions to a Solo 401k (and work income) . See the impact on your lifetime finances.
Do it yourself retirement planning: easy, comprehensive, reliable
Take financial wellness into your own hands and do it yourself retirement planning: easy,
Share this post:
Some individuals dream of the day when they can do absolutely nothing. To them, retirement is a euphoric future of sleeping in, lounging in the sun, and thinking as little as possible for the next 30 years of their lives. (Others dream up retirement business ideas.) In fact, for most of us, a life of…
Keeping your retirement savings on track helps you meet your retirement goals. That seems like a very simple concept, and in a way it is. But living with that plan every day isn’t quite so simple. Knowing how much one should save for retirement is useful — it can motivate you to take action. And…
You might be surprised by the facts of being an entrepreneur after 50! Financial success later in life is FAR more common than you might think.
Our weekly newsletter full of inspiration, podcasts, trends and news.
© 2023 NewRetirement, Inc. All rights reserved.
Disclaimer: The content, calculators, and tools on NewRetirement.com are for informational and educational purposes
only and are not investment advice. They apply financial concepts in a general manner and include
hypotheticals based on information you provide. For retirement planning, you should consider other
assets, income, and investments such as equity in a home or savings accounts in addition to your
retirement savings in an IRA or qualified plan such as a 401(k). Among other things, NewRetirement
provides you with a way to estimate your future retirement income needs and assess the impact of
different scenarios on retirement income. NewRetirement Planner and PlannerPlus are tools that
individuals can use on their own behalf to help think through their future plans, but should not be
acted upon as a complete financial plan. We strongly recommend that you seek the advice of a financial
services professional who has a fiduciary relationship with you before making any type of investment or
significant financial decision. NewRetirement strives to keep its information and tools accurate and up
to date. The information presented is based on objective analysis, but it may not be the same that you
find on a particular financial institution, service provider or specific product's site. All content,
tools, financial products, calculations, estimates, forecasts, comparison shopping products and services
are presented without warranty.