Solo 401(k): Guide to Self-Employed Retirement Plans

Read the Article

The short answer: Yes!

If you’re self-employed, have you ever wished that you could have a 401(k) plan, just like salaried employees? Well, you can. It’s called the solo 401(k), and it works just like an employer-sponsored 401(k) except it’s designed for a business with a single employee – you.

There are other types of retirement plans that you can set up as a self-employed person, including a traditional or Roth IRA, or a SIMPLE or SEP IRA. However, the contributions that you can make to a solo 401(k) can be considerably larger than these other plans.

How a Solo 401(k) Works

A solo 401(k) is like a regular 401(k) plan except it is for cases where you are the only employee of your business. If your spouse works in the business, he or she can also be included in the plan too. If you already have employees, you can’t use a solo 401(k). If you eventually hire any employees, the solo 401(k) simply converts to a regular, employer 401(k) plan.

There are three primary factors that differentiate the solo 401(k) from an employer 401(k):

  • As the business owner, you are both the employer and employee on the plan
  • The contributions that you make to a solo 401(k) are generally more generous than they will be for an employee participant in typical large company 401(k) plans
  • A solo 401(k) can be set up for any type of self-employment, including if you are an independent contractor or a freelancer

A solo 401(k) plan can also be a self-directed plan since you can choose to invest the money with any investment broker trustee that you choose. You can even set up a solo Roth 401(k) within the plan, and contribute up to $5,500 toward that portion of the plan each (or $6,500 if you are 50 or older). However, any employer matching contributions on the solo Roth 401(k) portion of the plan will need to be contributed to the regular solo 401(k) part of the plan.

Contribution Amounts

As an “employee” of your business, you can contribute up to $18,000 per year to your solo 401(k) plan. If you are 50 or older, you can contribute up to $24,000. This is the same contribution limits that apply to employer-sponsored 401(k) plans. You can contribute up to 100% of your earned income, up to these contribution limits.

Since you’re also the “employer” in your business, you can make a matching contribution to the plan. You can contribute as much as 25% of your net income as a profit-sharing contribution. Because of the dual contributions, you can usually contribute more money to a solo 401(k) plan than you can to other types of retirement plans. If your spouse also works in the business, he or she could also make a similar contribution based on their own income from the business. The maximum amount that you can contribute to a solo 401(k), from both individual and employer contributions, is $54,000 for 2017. This limit will also apply to contributions by your spouse.

Should You Set-up a Solo 401(k) Plan if You’re Self-employed?

If you’re self-employed and looking to add a retirement plan to your business, the solo 401(k) is an excellent choice to help you save money for the future. It has the most generous contribution limits of all self-employed plans, which not only creates a bigger retirement plan faster, but it also helps lower your tax liability (but not FICA taxes).

Solo 401(k) plans are also easy to set up, and easy to administer. You can set them up in a self-directed brokerage account, and have complete control over the investments that you use. And best of all, if and when you hire additional employees, you can simply convert the solo 401(k) to a regular employer 401(k) with very little hassle. If you want to build your nest egg and you’re looking for a self-employed retirement plan, consider the solo 401(k)!

Don’t worry about knowing these rules. If you contribute to a solo 401K, TurboTax Self-Employed will give you the related tax deductions you’re eligible for based on your entries.

Leave a Reply