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Maximize Your Retirement Savings with a Solo 401(k)

Are you a self-employed individual or a career freelancer looking for a powerful long-term savings tool? A Solo 401(k) might be the perfect solution for you. In this comprehensive guide, we’ll explore how a Solo 401(k) works, its contribution limits, tax advantages, and how to open one. At O1ne Mortgage, we’re here to help you navigate your retirement savings options. Call us at 213-732-3074 for any mortgage service needs.

How a Solo 401(k) Works

A Solo 401(k) is a retirement savings plan designed for business owners with no employees. If your spouse earns income from the business, they can also participate. This type of retirement plan mirrors a traditional 401(k) in many ways, offering attractive tax benefits and helping you grow your nest egg over time.

Eligibility

To be eligible for a Solo 401(k), you must be self-employed or own a business with no employees other than a spouse. Your business must also have an employer identification number (EIN).

Contribution Limits

For 2023, the contribution limits for a Solo 401(k) are as follows:

• As the employee: You can contribute up to $22,500 of earned income. Those who are 50 or older can contribute an extra $7,500.
• As the employer: You can contribute up to 25% of your compensation. If you’re self-employed and your business isn’t structured as a corporation, you can calculate your earned income by taking your net earnings and subtracting half of your self-employment tax and contributions for yourself.

In total, contributions can’t exceed $66,000 in 2023 (excluding catch-up contributions for those 50 or older). This includes both the elective deferrals you make as the employee and your contributions as the employer.

Tax Advantages of a Solo 401(k)

One of the main benefits of a Solo 401(k) is its tax advantages:

• Employee contributions are tax-deductible: When you file your personal income tax return, contributions you made as an employee will be tax-deductible, reducing your taxable income during your working years.
• Employer contributions count as a business expense: The money you put in as an employer is considered a deductible business expense for incorporated businesses. If your business is structured differently, these contributions will likely qualify as a personal tax deduction.
• Your money grows on a tax-deferred basis: You won’t owe taxes on Solo 401(k) funds until you begin taking distributions, allowing you to avoid paying taxes on investment gains along the way.
• Consider a Solo Roth 401(k): Roth 401(k)s are funded with after-tax dollars. Contributions are not tax-deductible, but you can make tax-free withdrawals in retirement. Early withdrawal penalties also apply. Beginning in April 2024, Roth 401(k)s will be exempt from required minimum distributions.

Is a Solo 401(k) a Good Idea?

If you’re self-employed and looking for a tax-friendly way to save for retirement, a Solo 401(k) is worth considering—especially if your spouse also earns income from the business. If you both participate, it could help accelerate your family’s nest egg. Participants are able to contribute more compared to a traditional 401(k), and the tax benefits offer another incentive.

However, not all business owners can contribute to a Solo 401(k) plan. If you have employees who aren’t contract workers, you may need another way to save for the future. Some options include:

• Traditional Individual Retirement Account (IRA): Traditional IRAs share some of the same characteristics of 401(k)s, though contribution limits are lower. Contributions may also be tax-deductible. Early withdrawal penalties and required minimum distributions apply.
• Roth IRA: With this type of retirement account, you’ll enjoy tax-free distributions in retirement, and there are no required minimum distributions. You can withdraw your contributions at any time, as long as you’ve had the account for at least five years.
• SIMPLE 401(k): SIMPLE is shorthand for Savings Incentive Match Plan for Employees. These 401(k)s are geared toward small businesses with fewer than 100 employees.

How to Open a Solo 401(k)

Opening a Solo 401(k) involves a few key steps:

Compare Solo 401(k) Providers

Many investment brokerages offer Solo 401(k)s. Shop around to see which provider feels like the right fit. Comparing fees, investment choices, and investor support resources can help guide you.

Decide on the Right Type of Solo 401(k)

Decide if you prefer the tax benefits of a traditional Solo 401(k) or a Roth. The latter might make sense if you expect your tax bracket to be higher in retirement than it is now.

Open Your Account and Select Your Investments

You’ll likely choose from a variety of mutual funds and exchange-traded funds (ETFs). If you aren’t sure where to start, a financial advisor can provide personalized investment guidance. Some Solo 401(k) providers also provide investment support.

Comply with IRS Rules

Be sure to stay within the annual contribution limits. Employee contributions generally must be made by December 31 of a given tax year. The deadline for employer contributions is usually the tax filing deadline, typically in mid-April of the following year. If your plan exceeds $250,000 in assets, you’ll likely need to file Form 5500-EZ annually.

The Bottom Line

A Solo 401(k) plan can help self-employed workers maximize their retirement savings. They offer several tax advantages and have generous contribution limits. It can be especially attractive if your spouse also earns income from the business.

At O1ne Mortgage, we’re dedicated to helping you achieve your financial goals. Whether you’re looking to open a Solo 401(k) or need assistance with any mortgage services, we’re here to help. Call us today at 213-732-3074 to learn more about how we can assist you.

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