Written by Alex Seleznev, MBA, CFP®, CFA | Feb 21, 2024
Are you self-employed or a small business owner?
Perhaps you plan to open your own practice in the future and want to maximize your retirement savings?
A Solo 401(k) will likely be the best choice for you.
Sadly, many people are not aware or simply confused by the benefits of these accounts and opt for simpler but less versatile SEP-IRA accounts.
If you are not a small business owner, keep reading. There is a possibility that you will benefit from a Solo 401(k) if you do any consulting work in addition to your full-time job.
1.) What are the basics of a Solo 401(k) account?
You are allowed to open this account if you are self-employed and do not have any employees. Your spouse is allowed to be part of the plan if he/she is part of your business.
The biggest advantage of Solo 401(k) accounts is your ability to contribute as an employee and employer of your own firm.
In 2024, you are allowed to contribute $23,000 as an employee ($30,500 for those over the age of 50) and up to 25% of your net self-employed income.
The total contribution cannot be more than $69,000 ($76,500 for those over 50) in 2024.
2.) Why are Solo 401(k) accounts better than SEP-IRAs?
In many cases, you will be able to contribute more and maximize your retirement and tax savings.
Assume you have $75,000 in net self-employed income.
Your maximum SEP-IRA contribution will be approximately $75,000 x 25% = $18,750.
If you create a Solo 401(k), your maximum contribution will be $23,000 plus ($75,000 - $23,000) x 25% = $36,000.
This is almost double when compared to the SEP-IRA option!
3.) Who should consider creating a Solo 401(k) account?
If you expect to consistently earn more than $50,000 in self-employed income, you should consider creating a Solo 401(k).
If your income is above $100,000, we strongly encourage you to explore this option!
4.) What are some of the disadvantages of a Solo 401(k) account?
You will need to file an additional tax form once the account balance reaches $250,000. This is not a big issue in most cases.
You will need to terminate the plan and rollover the funds to your IRA if you shut down your business.
5.) Is it difficult to open a Solo 401(k) account?
Not at all. Most investment companies have standard forms to open these accounts.
You can create a Solo 401(k) in less than 30 minutes.
In short, many self-employed and small business owners will likely benefit from the additional contributions and related tax savings allowed by Solo 401(k) plans.
The best approach is to evaluate this option based on your circumstances and decide what works best for you and your business.