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When a solo 401(k) makes sense for the self-employed


Many self-employed people are learning that they can have a 401(k) plan just for themselves. That’s great as there can be some real advantages versus other options like an IRA. Because there is typically a small price to setup and maintain an individual 401(k) plan, here are three things to consider upfront that will help you decide when it will make sense for you:

  1. Are you in position to contribute more than $5K a year on-going in your account? If not, an IRA is likely your best option. To make a 401(k) worth your while from a savings and tax standpoint, you’ll want to take advantage of a 401(k)’s 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 $49,000 tax deferred in your 401(k) account ($54,500 if you are over 50). This could even drop you a tax bracket!
  3. Do you earn too much to have Roth IRA? If so, there is no income limit to use the Roth 401(k) option of your account and you can contribute up to $16,500 into it this year.

And with a 401(k) plan you receive the peace of mind that in an emergency, you can access your funds with a 401(k) loan and then pay your 401(k) account back (generally a 5 year term – there may be tax penalties if you do not pay it back). Given the low cost, flexibility, and high contribution limits, a solo 401(k) can be a great way to save.

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