Where to Save for Retirement When You’re Self-Employed

Saving for retirement can be daunting, especially when you run your own business. Many sole proprietors establish SEP IRAs to achieve tax deferred growth for retirement. If you work for yourself, a Solo 401(k) is another option to consider that may be even more beneficial. Here are the details on how a Solo 401(k) plan works:

Who Can Participate?

A business owner, and a business owner’s spouse (provided the spouse works for the business)¹can participate in the Solo 401(k) plan.

Contribution Limits

The total contribution to a Solo 401(k) for 2021 is capped at $58,000 ($64,500 if you will be 50 or older in 2021). That is, your total employee and employer contributions for 2021 cannot exceed these ceilings.²

Your 2021 employee contribution can be up to 100% of your compensation, but no more than $19,500 (this limit rises to $26,000 if you are age 50 or older).

Your 2021 employee contribution can be as large as 25% of your compensation (20% if you are a sole proprietor or a Schedule C taxpayer) or $58,000, $64,500 if you will be 50 or older.²

Paperwork Requirements

While it’s recommended that you keep records of contributions and deferrals, you may not have to file regulatory documents until assets reach $250,000. Your tax, legal or financial professional can provide some guidance.³

How is it Invested?

You can serve as the trustee of your Solo 401(k), which means you have the choice how to invest your Solo 401(k) assets.⁴ Investment choices will differ based on the account custodian. You may even have the option to make Roth contributions as well.

Required Distributions

Under the SECURE Act, once you reach age 72, you must begin taking required minimum distributions from your Solo 401(k) or other defined contribution plans in most circumstances. Withdrawals from your 401(k) or other defined contribution plans are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty.

Click here to get additional details regarding the different small business retirement plan options including eligibility, contribution limits, timing, etc.

Contact us today to get started on a financial plan, and we can help see if a Solo 401(k) works best for your financial situation.