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Is a Solo 401(k) right for you?

Is a Solo 401(k) right for you?

| May 15, 2023

How do you put money aside for retirement when you’re self-employed?

One approach to consider is a Solo 401(k).

If you work for yourself, a Solo 401(k) may help you focus on your retirement savings. These are not garden-variety 401(k) plans: their annual contribution limits are higher than traditional 401(k)s, and both you and your business have the potential to contribute to them each year.

Once you reach age 73, you must begin taking required minimum distributions from your Solo 401(k) or other defined contribution plans in most circumstances. Withdrawals from your 401(k) or other defined contribution plans are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty.

Solo 401(k)s are designed for the smallest businesses. At most, they can have two participants: a business owner and a business owner’s spouse (provided the spouse works for the business).1

You may be able to put as much $66,000 into a Solo 401(k) in 2023. If age 50 or over, the limit increases to $73,500. The Internal Revenue Service lets you contribute to a Solo 401(k) as an employee, and it also lets your business make a profit-sharing contribution to the plan.1

Here’s how this works. Your 2023 employee contribution can be up to 100% of your compensation, but no more than $22,500 (this limit rises to $30,000 if you are age 50 or older). The contribution from your business in 2023 can be as large as 25% of your compensation (20% if you are a sole proprietor or a Schedule C taxpayer) or $66,000, $73,500 if you will be 50 or older.1

Your total contribution to a Solo 401(k) for 2023 is capped at $66,000 ($73,500 if you will be 50 or older in 2023). That is, your total employee and employer contributions for 2023 cannot exceed these ceilings.1

Keep in mind that this article is for informational purposes only. It’s not a replacement for real-life advice, so make certain to contact your tax, legal or financial professional before making any changes to your retirement strategy.

Solo 401(k)s may not burden you with excess paperwork. While it’s recommended that you keep records of contributions, deferrals, and investment performance, you may not have to file regulatory documents until assets reach $250,000. Your tax, legal or financial professional may be to provide some guidance.1

Solo 401(k)s can be wholly under your control. You can serve as the trustee of your Solo 401(k), which means you may choose to invest your Solo 401(k) assets in many different ways.2

You can see why this plan may appeal to sole proprietors and independent contractors: high yearly contribution limits, two ways to contribute, and less paperwork to manage than many other small business retirement plans.

If you need to save more for retirement, the Solo 401(k) may be just the retirement plan choice for you. We would be more than happy to talk about your retirement saving options.