When you are self-employed, you have to wear many hats. You’re both owner and employee and your successes and failures can typically only be attributed to one person: you. Additionally, when it comes to retirement plans, you have some interesting options afforded to you due to your unique status.
A Solo 401k plan allows you to contribute to your retirement fund as both employer and employee, while enabling you to reap big benefits on your taxes.
What is a Solo 401k?
A Solo 401k is a retirement plan designed specifically for self-employed individuals with no employees other than the business owner and his/her spouse.
What are the Benefits of a Solo 401k?
A solo 401k allows the self-employed individual to enjoy significant tax deductions, allows contributions as an employee and employer, and provides loan flexibility.
- Significant Tax Deductions. A solo 401k plan allows the individual to take advantage of the highest maximum contribution limits available to self-employed individuals.
- Ability to Contribute as an Employer and Employee. As was stated earlier, you are your own employee and your own boss. In those two roles, you are able to contribute to your retirement fund. In 2021, your employee contribution can be up to $19,500. Additionally, your employer contribution can be up to $37,500. This comes to a total contribution of up to $58,000 for the year.
- Loan Flexibility. While it is generally considered wise to let your money grow in your retirement fund, emergencies and unexpected issues do arise. If you should find yourself in a tough position, you can borrow up to 50% of your plan value or $50,000 dollars, whichever amount is less.
Other than these the retirement plan can also help to plan for the future once you decide to retire from your company. While most people may neglect the importance of planning for retirement, it is one of the most essential aspects that will ensure you live comfortably afterward. Moreover, old age can bring in various issues, including living expenses, medical conditions, healthcare, and more, along with additional costs like opting for respite care for seniors, for which the 401k can be beneficial.
What Factors Do I Need to Consider in Choosing a Solo 401k Plan?
When selecting a solo 401k plan, many factors will be at play including, but not limited to price of plan, setup/management of plan, available support, and flexibility.
- Price of Plan. You’ll want to weigh the costs of each plan and any applicable fees that come along with said plan.
- Setup/Management of Plan. Look for a plan that has easy and straightforward options to manage your investments. You don’t want to waste your time trying to navigate a complicated service that doesn’t fit your needs.
- Available Support. Are you comfortable with online chats as your only form of support for your needs, or would you prefer to have phone service as well? These are items to consider when choosing a plan and service.
- Flexibility. What is most important to you in a plan? Make sure you have a good handle on when and how you can contribute to and take from your fund if needed.
While being self-employed has its risks, some of the benefits afforded to you are unmatched. You should be exploring all your options by researching the differences between an IRA and a 401k plan by looking at information on company websites like SoFi. However, the benefits of a solo 401k plan are numerous and should be strongly considered by any self-employed individual. An in-depth discussion about your individual needs with a qualified financial professional is an excellent first step, if considering a solo 401k or any other retirement options.