Self-employment comes with undeniable benefits, such as the freedom to work where and when you want. But if you serve as both the sole employer and employee within your company, you may be concerned when it comes to retirement planning. Without access to the funds available to big corporations, how can you ensure that you’ll have security in your retirement?
Luckily, a solution exists for these self-employed individuals in the form of a unique retirement plan known as a Solo 401k. Solo 401k plans allow those who go out on their own to have access to a retirement plan that allows for excellent tax deductions, the option for structuring the plan as a “Roth” or “Traditional” 401k, and the ability to take out loans, if needed.
Tax Deductions with a Solo 401k
For independent contractors, freelancers, and others who serve as both employer and employee within their business; the tax deductions inherent in a Solo 401k plan are incredibly tempting. Because you serve two roles (employee and employer) within your company, you can contribute to your plan in both capacities.
As an employee, you can contribute as much as $19,500. For those over the age of 50, there is an additional $6,500 available in contributions.
In your role as employer, you may contribute as much as $37,500. Add this to your employee contributions, and you are able to save a grand total of up to $57,000 a year with a Solo 401k plan.
“Roth” and “Traditional” Solo 401k Plan Options
Depending on the needs of your business, you have the option to make “Roth” contributions to your plan, which are after-tax dollars, or “Traditional” contributions which are pre-tax dollars. Depending on how you think taxes will affect your business in the future, your current financial situation, and other factors; you have the flexibility to structure your plan in whatever way will work best for you.
Loan Availability with a Solo 401k
There’s no doubt that if you are able to, you should let your retirement fund grow and not touch the money until you retire. However, for those who have few resources to fall back on, there may not be many places to turn when difficult financial situations arise. For this reason, a Solo 401k plan allows the self-employed individual to take out loans of up to $50,000.
How to Start a Solo 401k
Starting a Solo 401k is an easy process that takes very little time. If you’re ready to open a Solo 401k for your business, you’ll want to follow the steps below:
- Contact an online broker and choose a Solo 401k provider.
- Complete all of the necessary forms and applications, indicating whether you’d like to make “Roth” or “Traditional” contributions.
- Start investing in whichever type of stock, fund, or bond you prefer.
- Keep on top of deadlines such as the December 31st investment deadline for employees and the April 15th filing deadline for employers.