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The Business of Savings
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:
- 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.
- 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!
- 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.