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What is a Solo 401K?

What is a Solo 401K?

What is a Solo 401K?

As a sole proprietor, it can be difficult to find ways to set aside funds for your future. After all, your business is in your own hands, and you don’t have the luxury of matching contributions from an employer to grow your retirement account. Fortunately, there are ways to work around these obstacles and ensure your future financial security. One such method is that of adopting the solo 401(k) retirement savings plan, specialized for self-employed individuals and sole proprietors. Read on to learn more about this program. 

What Exactly is the Solo 401(k)? 

The solo 401(k) – known by a wide variety of names, including the “Single(k)” and “self-employed 401(k),” – is essentially a dramatically condensed version of traditional 401(k)s. Instead of imposing responsibilities on separate parties, you act as both the employer and employee, and reap the same benefits provided by most other traditional 401(k) plans. 

With a solo 401(k), you can maximize your retirement contributions, even when you are participating in the plan on your own. What’s more is that you can then deduct the costs of maintaining your plan, as well as your contributions, as a business expense, ultimately growing your retirement savings even more. 

As the name suggests, those who qualify for a solo 401(k) plan must be self-employed or earning a significant level of income from a self-employed venture. Without meeting these criteria, you will be ineligible to contribute to a solo 401(k) retirement plan. Note that this does not mean that your self-employed work must be full-time. So, even if you are running a side hustle alongside your regular, full-time employment, you can qualify for the solo 401(k) plan. Your self-owned business can be structured in the following ways:

  • Sole proprietorship
  • Self-owned corporation
  • Sole partnership

More specifically, these plans are designed for individuals who own businesses with no employees or employees who do not qualify for an employer-sponsored plan. (If your employees work less than 1,000 hours per year, and are 21 years of age or younger, for example, they are ineligible for an employer-sponsored retirement program.)

Further Details About the Solo 401(k) Plan

It can be intimidating to initiate a retirement savings plan on your own. You may already be stressed by taxes, fees, business expenses, and all the other existing costs of running your business as-is. The thought of putting away more money can be overwhelming, but upon reviewing the details of the solo 401(k), you will see just how profoundly this financial choice can benefit your future. As of 2020, you can adapt your retirement contributions to your needs while adhering to the following limits:

  • Salary deferral contributions can amount to $19,500
  • Profit sharing contributions can reach up to 25% of your income
  • Each participant can contribute up to $57,000 (or less than 100% of income) annually
  • Participants that are 50 years or older can do catch-up contributions up to $6,500

As you can see, you have the option to reap the same financial benefits of the traditional 401(k) program all on your own, based on a contribution structure that works best for you. The deadline to register for your solo 401(k) is December 31, so get in touch with a retirement plan provider to get started as soon as possible.