Are you self-employed? Learn how you can contribute to your retirement plan as an employee AND as the employer by using a Solo 401(k).

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Solo 401(k)s are a retirement savings plan that is specifically designed for self-employed individuals or small business owners with no employees, other than a spouse. These types of retirement accounts offer the same benefits and tax advantages as traditional 401(k) plans, but are tailored to meet the unique needs of individuals who are running their own businesses.

One of the key benefits of a Solo 401(k) is the ability to make higher annual contribution limits compared to other retirement plans. In 2021, the contribution limit for a Solo 401(k) is $19,500 for individuals under the age of 50, and $26,000 for those age 50 and older. In addition to these elective deferrals, self-employed individuals can also make employer contributions of up to 25% of their net self-employment income, with a total combined contribution limit of $58,000 for individuals under 50 and $64,500 for those age 50 and older.

Solo 401(k)s also offer a unique feature known as a Roth option, which allows participants to make after-tax contributions to their retirement account. While contributions to a traditional Solo 401(k) are tax-deductible, Roth contributions are not, but withdrawals in retirement are tax-free. This can be advantageous for individuals who anticipate being in a higher tax bracket in retirement or who want to diversify their tax liability.

Another key advantage of a Solo 401(k) is the ability to take out a loan from the plan. Participants can borrow up to 50% of their account balance (up to a maximum of $50,000) for any purpose without penalty or taxes, as long as the loan is repaid within a specified time frame.

It’s important to note that in order to be eligible for a Solo 401(k), you must have self-employment income from a business that is registered as a sole proprietorship, partnership, LLC, or corporation. Additionally, your business cannot have any employees other than yourself and your spouse, although there are exceptions for employees under the age of 21 or those who work less than 1,000 hours per year.

In conclusion, Solo 401(k)s are a powerful retirement savings tool for self-employed individuals and small business owners who want to maximize their contributions and tax advantages. By understanding the unique features and benefits of these plans, individuals can take control of their retirement savings and set themselves up for a secure financial future.