Saving for retirement is a must for anyone who is of working age. It’s important to have the right type of retirement account, however, as different types of accounts are available to meet different needs. If you’re a business owner who has no employees, then the solo 401(k) retirement account was designed for you.
What Is a Solo 401(k)?
A solo 401(k) retirement account is an account designed to provide the self-employed with the benefits of an employer-sponsored retirement account like a 401(k). It’s designed specifically for those who work for themselves, either in a sole proprietorship or self-employed. It’s a retirement account for a solo business owner with no employees.
Who Qualifies to Have a Solo 401(k) Retirement Account?
In order to qualify for a solo 401(k) account you have to be a solo business owner. You don’t have to have incorporated your business and could be a sole proprietor. However, you can’t have any employees or work for someone other than yourself. The only other person who could benefit from your solo 401(k) account is a spouse.
What Are the Contribution Limits for a Solo 401(k)?
In 2022, the contribution limit for a solo 401(k) was $61,000, but this amount increases in 2023 to $66,000. The amount you’re allowed to contribute with a solo 401(k) is larger than with an employer-sponsored 401(k) because you’re taking on the roles of both employee and employer. So the contribution is made up of two components: 1) the employee payroll deferral ($20,500 for 2022) and 2) the employer match (25% of payroll). If you’re over the age of 50, there’s an additional $6,500 that you can contribute as a catch-up in 2022. This catch-up contribution is increased to $7,500 in 2023. Contribution limits may change again in the future.
Is a Solo 401(k) Traditional or Roth?
A solo 401(k) retirement plan can be either a traditional 401(k) or a Roth 401(k). Which one you should choose depends on your needs. With a traditional 401(k), all contributions are pre-tax. This means that your total taxable income is less. However, the contributions are taxed when you take money out of the account. By contrast, with a Roth 401(k), contributions are after-tax, which means that you’ve already paid the taxes on that money and won’t need to do so later when you’re taking out distributions.
How Do You Set up a Solo 401(k)?
A solo 401(k) has to be set up before December 31st of the year before you want to start contributing to it. You don’t have to have the account funded until your tax deadline, which differs depending on the type of business you have, but you do have to have the account set up before the end of the year.
To get started, talk to your AllGen Financial Advisor as soon as possible to get your solo 401(k) account set up before the deadline. You’ll need to have your EIN handy.
What Is the Deadline to Fund a Solo 401(k)?
For all incorporated business types, you have to have the payroll side of the account funded by January 15th. For the profit-sharing side, you’ve got a bit more time and the date depends on what type of business you have. If your business is incorporated, then the deadline is March 15th. If you’re an independent contractor or you have a sole proprietorship, then that deadline is April 15th for both sides of the contribution. You can apply for an extension, which would make the date September 15th for incorporated businesses and October 15th for sole proprietors and independent contractors.
Why Should You Get a Solo 401(k)?
With a solo 401(k), you’ll be able to contribute more each year to the account than you would if you set up an IRA or if you had an employer-sponsored 401(k). You still get to choose your tax advantages by setting up either a traditional 401(k) or a Roth 401(k). Plus, you have the benefits of having more investment options than you would with an employer-sponsored retirement plan.
What Is the Difference Between a Solo 401(k) and a Self-Directed IRA?
An IRA account is another type of retirement plan that is popular with those who don’t have employer-sponsored accounts. However, there’s a much smaller limit on contributions, so if you have your own business, then it’s a better option to build your retirement account up faster to choose a solo 401(k).
What Is the Difference Between a Solo 401(k) and a SEP IRA?
A SEP IRA is a Simplified Employee Pension Plan. The contribution is a percentage of the worker’s payroll or salary. This is in line with the employer side of the profit-sharing side in a solo 401K. However, that would be the extent of the contribution as there is no employee payroll deduction in a Sep IRA.
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