Many entrepreneurs fail to understand the tax obligations involved in self-employment since they are both the employer and the employee. A Solo 401(k) retirement plan is designed to assist qualified entrepreneurs and business owners save for their retirement while enjoying tax benefits and financial flexibility. Here is all you need to know about a Solo 401(k) plan.
What is Solo 401(K) and How to Apply for it?
A Solo 401(k) retirement plan allows individuals to contribute as an employee and an employer from their pre-tax salary. As an employer, you can save a maximum of 25% of your income in profit-sharing contributions through a Solo 401(k). On the other hand, as an employee, you can save a maximum of $19,500, or 100% of your compensation based on which is the lower amount. Individuals above 50 years can contribute an additional $6,500 to the plan.
Here are the steps you can follow to start a Solo 401(k) plan:
- Choose a professional Solo 401(k) provider who will help you set up the plan.
- Submit the application and adoption agreement to receive your new account details and EIN or Employer Identification Number. You will have the ability to choose from a traditional or a Roth plan at this time.
- Start contributing to the plan and invest in mutual funds, stocks, exchange-traded funds, index funds, bonds, or certificates of deposit of your choice.
- When you start your Solo 401(k), always ensure to meet the plan contribution deadlines listed by the IRS. All employee contributions should be made by December 31st each year while the employer contributions are required to be made before April 15th of the following year.
Solo 401(K) Plan Benefits
You can enjoy the following benefits through a Solo 401(k) plan:
- The Solo 401(k) plan has the highest contribution limit so that you can enjoy high tax deductions coupled with the ability to maximize your contributions.
- Ability to reduce tax burden with the tax deferral option.
- Flexibility to borrow a loan from your retirement funds if you are in immediate need of money.
Factors to Consider When Choosing Solo 401(K) Plan
This plan is most suitable for freelancers, sole proprietors, entrepreneurs, independent contractors, or side-job workers. Here are some factors to consider when selecting a Solo 401(k) plan:
Plan Costs: One of the main advantages of the Solo 401(k) plan is that it is free from asset management costs and trading fees. You can select a plan provider who provides complete plan transparency and has a low-cost model.
Easy Set-Up and Plan Management: Your retirement plan should be easy to set-up and understand and include a user-friendly dashboard for general plan management tasks. It is suggested to select a plan provider who offers online tools for easy investment management, savings reports, and so on.
Quality Support Service: Always ensure that you select a provider who has a good customer support team that is capable help you if you face any plan-related issues.
Flexibility: Lastly, ensure that you select a plan that offers flexible contributions, easy borrowing or funding, a wide range of investment selection, and has a long-term sustainable investment option.
