For those of you who are self-employed it is important that you save for your own retirement. Building a business is hard work. For business owners who work solo, or who have a spouse and/or a partner in the business with them, a Solo 401(k) may be the right option. Here are five reasons to consider a Solo 401(k).
High maximum contributions
For 2016 the maximum contribution limits are $53,000 and $59,000 for those who will be 50 or over in 2016. This includes the regular employee 401(k) contribution limits of $18,000 and $24,000 for those 50 and over, plus an employer-funded profit sharing component. The profit sharing portion can range from up to 20% to up to 25% based upon the type of entity structure you have chosen for your business. Check with your financial or tax advisor as to how much you will be able to contribute.
A Solo 401(k) can be opened at many popular custodians such as Schwab, Fidelity, Vanguard, T. Rowe Price, and many others. Just like an IRA or a SEP-IRA you can invest in a range of investment options such as mutual funds, ETFs, closed-end funds, individual stocks and bonds or any other investment vehicle that is offered by the custodian that isn’t prohibited by 401(k) rules.
While the high maximum contributions are an advantage for those self-employed individuals with the income and cash-flow to afford them, there is no requirement for you to make any level of contribution per year. In fact, if need be you can skip a year if desired.
Another form of contribution flexibility is the ability to make the employee contributions up to the maximum as long as you earn enough. Contrast this to a SEP-IRA where the contribution is a percentage of your income and your contribution amount could be much lower in years when your self-employment income is lower than normal. This means that as long as you have the cash to make the contribution, the Solo 401(k) would generally allow a larger contribution at lower levels of income than a SEP-IRA.
Easy to open and maintain
Most major custodians and brokerage firms welcome these accounts and make the process of opening and funding your account easy. Most of these firms use a prototype plan and there are very few regulatory or administrative requirements until your account balance gets up to the $250,000 level.
Roth options are available
Depending upon the custodian you select, a Solo Roth 401(k) option might be available to you. Just like a 401(k) plan with an employer, the Solo Roth 401(k) option allows larger Roth contributions than the Roth IRA limits. Additionally, for those whose income is too high for a Roth IRA, the Roth Solo 401(k) can be a good option as there are no income limitations on Roth 401(k) contributions.
If you are interested in opening a Solo 401(k) here are a few things to keep in mind:
- In order to contribute to a Solo 401(k) for the current year the account must be opened by December 31. Contributions can then be made up to your tax filing date, including extensions. This date will differ depending upon the type of business entity you have chosen for your company; it is best to check with your financial or tax advisor here.
- A Solo 401(k) only works for you, a partner, and/or a spouse. If you have employees this is not the vehicle for you. Check with your financial advisor or prospective custodian for more on this.
- If you are interested in a Roth feature and/or the ability to take loans from your account, you will want to make sure that the custodian you are considering offers these features. You will also want to inquire about any and all account fees. Note that any trading fees or mutual fund purchase charges that apply to other accounts at the custodian will generally apply here as well.
The Solo 401(k) can be a great self-employed retirement plan. The main thing is if you are self-employed you need to start saving for your retirement. You work too hard to put this off any longer and if you don’t save for your own retirement nobody else will do it for you.
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