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Is a Solo 401(k) Plan Better Than an IRA for the Self-Employed?

By ShareBuilder 401k

If you’re self-employed or have an owner-only business, you may not realize you can have a 401(k) plan just for yourself. In fact, you can, and as you see in the blog title, it’s called a Solo 401(k) plan. What’s more, it has some serious advantages over one of the more commonly used retirement account types, the IRA.

The saving and tax advantages over an IRA can make a Solo 401(k) quite appealing for those earning over $75,000 per year. There are other reasons too. Our three-minute video below highlights Solo 401k benefits and what services and features are included:

The Top Four Considerations to Determine If a Solo 401(k) Is a Fit for You

  1. Are you in a position to contribute more than $6,000 per year? If not, an IRA is likely still your best option. To make a 401(k) worth your while from a savings and tax standpoint, you’ll want to take advantage of its higher contribution limits.
  2. Are you looking to lower your taxes this year? If so, a solo 401(k) enables you to contribute up to $58,000 tax-deferred dollars ($64,500 if you are over 50). This could even drop you a tax bracket!
  3. Are you unable to fully contribute to a Roth IRA because your income is over $125,000? If so, it’s worth noting there is no income limit to use the Roth 401(k) option in your plan, and you can contribute up to $19,500 into it this year.
  4. Do you want the potential to access the money penalty-free in case of emergency? The Solo 401(k) may also be a great fit over other retirement plan options because it offers penalty-free access to your 401(k) monies via a 401(k) loan. You are able to take a loan from your 401(k) balance and repay yourself back into your 401(k) over a 5-year period (or 30 years if using the funds towards the purchase of a primary residence). As long as the loan is repaid within the designated time period, tax penalties will not apply as they normally would for an early distribution. There are downsides to taking a 401(k) loan like this money not helping build for retirement as well as other considerations.
401(k) Advantages Over Traditional IRAs in 2021    
  401(k) IRA
Annual limit per individual $58,000
(employee + employer contributions)
$6,000
Age 50+ catch-up amount $6,500 $1,000
Roth income limit None $140K*
Penalty-free access, if needed Yes, via a loan No

*Beginning at $125K, the amount you are allowed to contribute begins to decrease, hitting $0 at $140K for singles (range is $198K to $208K for married couples filing joinly)

Any one of these four reasons can make a Solo 401(k) plan a fit for you and help you get saving on taxes and for your future too. As there is typically a price to start and maintain a Solo 401(k), it is important to contribute more than you would to a traditional IRA to make it truly worth your while. Remember, if you have full-time employees, you will not qualify for a Solo 401(k). However, if you have multiple owners but no employees, you can start up a Solo 401(k) plan today. Happy saving.


Meet the Author

Our low-cost 401k plans are easy to setup online and are supported by our 401k advisors and specialists. ShareBuilder 401k serves small business and medium-sized companies, as well as the self-employed. We offer Roth 401k, Safe Harbor 401k, Traditional 401k, and Solo 401k options. Your 401k plan is paired with investment management expertise and employee education to help you save more.