When you go out on your own in business, you are responsible for all of the good things that happen as well as all of the bad things that happen with your venture. Even though there are many benefits to going it alone, retirement planning is a hurdle that is difficult to overcome for the self-employed.
Luckily, the plan known as Solo 401k can serve as a life raft is the rough sea of retirement planning. Solo 401ks allow for excellent tax benefits, high contribution options, and the ability to take out loans if times get tough.
Solo 401k: Tax Benefits
With a Solo 401k, you have options when it comes to how your contributions are taxed. Depending on your individual needs and feelings on how taxes will change in the future, you can elect to make either “Roth” or “Traditional” contributions.
- Roth Contributions: After-tax or Roth contributions enable you to make contributions to your fund once taxes have already been applied. This means that when it is finally time for you to retire, you’ll be able to withdrawal your money without having extra taxes deducted. The money in your account will be yours, in-full, to do with as you see fit.
- Traditional Contributions: Pre-tax or Traditional contributions are those that are placed in your account and are then taxed as you make withdrawals in retirement.
No one can say what the future of taxes will be. This is why 401ks afford you the option of choosing how you will make your contributions, allowing you to get the most out of your retirement funds.
Solo 401k: High Contribution Limits
Solo 401k plans allow for the largest contribution limits available to self-employed individuals. This is due to the fact that you are serving as both employee and employer.
- Employee: In your capacity as employee, you can save as much as $19,500 (with an additional $6,500 if you are over 50).
- Employer: As an employer, you can save $37,500 each year.
This comes to a grand total of $57,000 each year in retirement savings with a Solo 401k plan.
Solo 401k: Loan Options
As a self-employed individual, you may have few resource options if your business falls on hard times. Therefore, if you find yourself in a difficult financial situation, you are able to take out the lesser of 50% of the plan’s value or $50,000.
How Do I Sign Up for a Solo 401k?
Signing up is as simple as picking up the phone and discussing your needs with a plan provider. However, throughout this process you’ll want to be aware of the of the plan elements that are most important to consider:
- Plan Fees. Ensure that your plan provider doesn’t impose any extra fees or have any associated costs.
- Plan Customizability. Make sure that your plan provider allows you to structure your plan how you need to in order to most benefit your business.
- Plan Initiation and Maintenance. Starting a plan should be a simple process and maintaining the plan or making changes should be just as easy.