The self-employed can have a 401(k) plan. It’s commonly called a Solo 401k or Individual 401k plan, and it can be a powerful way to build your retirement nest egg and lower your personal taxes too. Know that if you have any full-time employees, you will not qualify for this plan type.
How is a Solo 401k powerful you might ask? Well, the cool thing is that since you are both the employer and employee, you can contribute up to $61,000 per year as of 2022 ($58,000 in 2021) to the Solo 401k. Contributing this high amount not only lowers your current year's taxes, but it also might drop you a tax bracket. This can give your retirement savings a sizeable boost too. Of course, you must make some serious mullah to reach the limit, but regardless, the 401k contribution limits are so much greater than an individual IRA that many self-employed can benefit. For an example showing how a self-employed business owner contributing $50,000 to a Solo 401k can save an estimated $10,000 more in taxes, visit our Solo 401k product page.
Important Deadlines by Role (You Are Both the Employee and Employer)
There are important deadlines to know if you start a Solo 401k plan.
- As employee, you may contribute at any time during the calendar year up to the individual employee limit through the end of the calendar year. So, December 31st, or the last business day of the year for some providers, is the last day to make an employee contribution. As an employee, if your plan allows, you can make either tax deferred contributions, Roth 401k contributions, or both. If you are over 50 years of age, you can make a catch-up contribution as well. Lastly, you may choose to contribute in lump sum or establish a recurring ACH on a monthly or bi-weekly basis if you prefer the benefits of dollar-cost averaging.
- As an employer, you may make employer contributions until your business tax deadline which is March 15th for a few entity types but April 15th for most with a calendar fiscal year. You have more time with employer contributions to consider more closely your tax and saving needs for the year. Savvy Solo 401k users will determine and make a lump sum employer contribution either quarterly or often after the fiscal year end to best manage these needs. As the employer, you can typically put in 20%-25% of earnings into your Solo 401k up to the limit.
- If you are thinking about setting up your first Solo 401k, and you want it to qualify for the current year, you need to set it up in the current year. December is often a busy time for Solo 401k providers. Many self-employed companies wait until December (the last month of the year) to start their plan knowing it can help them manage the current year's taxes up until their tax deadline. If your business fiscal year is on a calendar year basis, don’t wait until January, or it will be too late to use a Solo 401k to help manage your past year’s tax and retirement saving needs.
To learn more about Solo 401ks including how the limits work and FAQs, just visit our Solo 401k product page.