Most entrepreneurs are both the employer and the employee but they fail to consider the tax obligations while seeking freedom through self-employment. A Solo 401(k) helps qualified solo business owners and entrepreneurs to set up a retirement plan to save for their future while enjoying financial flexibility and tax benefits.
What Is A Solo 401(K) And How to Apply for It?
Solo 401(k) plans are designed such that an individual is making contributions to the plan as an employer and an employee from their pre-tax income. As an employer, an individual can save 25% of their income in profit-sharing contributions. While, as an employee, an individual can save up to $19,500, or 100% of their compensation for whichever is the lesser amount. If you are above 50 years of age, you can add an additional $6,500 to the contributions.
You can follow the steps listed below to start your Solo 401(k) plan:
- Select a Solo 401(k) provider who can assist you in setting up the plan.
- Fill in an application and adoption agreement following which you will receive your new account along with the Employer Identification Number or EIN. You can select from a traditional or a Roth plan.
- Set up your contributions and start investing in index funds, exchange-traded funds, certificates of deposit, mutual funds, stocks, or bonds of your choice.
- Always ensure that you are meeting the deadlines to start your Solo 401(k) plans. All employee contributions need to be made by December 31st every year and the employer contributions should be made by the tax-filing deadline of April 15th.
Benefits of A Solo 401(K) Plan
According to plan provider Ubiquity, the key benefits of a Solo 401(k) plan are:
- You can maximize your contributions to receive high tax deductions since Solo 401(k) offers the highest contribution limit.
- Option to defer your taxes and reduce your tax burden for the year.
- Flexibility to borrow money from the plan if you are in immediate need of funds.
Factors to Consider While Selecting A Solo 401(K) Plan
A Solo 401(k) plan is best suited for entrepreneurs, independent contractors, freelancers, sole proprietors, or side-job workers. You should take the following factors into consideration when selecting a plan.
Plan Costs: Solo 401(k) plans are usually free from any trading fees or asset management costs. Always choose a plan provider that provides a low-cost model and is transparent.
Easy Set Up and Management of the Plan: Your plan should be simple to understand and include a user-friendly dashboard for easy set up and regular plan management. It is recommended to select a provider who has online tools that allow you to manage investments, run reports, and more.
Quality Support Service: Ensure that you have a plan that is backed by a solid customer support team that is willing to assist you with plan-related issues that you may face.
Flexibility: In addition to the above, always choose a plan that provides flexibility for making contributions, choosing investments, borrowing or funding money, and has a sustainable long-term investment option.