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
- 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.
- Are you looking to lower your taxes this year? If so, a solo 401(k) enables you to contribute up to $61,000 tax-deferred dollars ($67,500 if you are over 50). This could even drop you a tax bracket!
- Are you unable to fully contribute to a Roth IRA because your income is over $129,000? 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 $20,500 into it this year.
- 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 2022 | ||
|---|---|---|
| 401(k) | IRA | |
| Annual limit per individual | $61,000 (employee + employer contributions) |
$6,000 |
| Age 50+ catch-up amount | $6,500 | $1,000 |
| Roth income limit | None | $144K* |
| Penalty-free access, if needed | Yes, via a loan | No |
*Beginning at $129K, the amount you are allowed to contribute begins to decrease, hitting $0 at $144K for singles (range is $204K to $214K 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.