Solo 401(k) or Self-Employed 401(k): Contribution Limits, Benefits, How to Open One

What Is a Solo 401(k)?

If you're a freelancer aliases an independent contractor, you mightiness presume that you don't person entree to a 401(k). But that conscionable isn't true. You don't person to spell without a tax-advantaged status savings plan: you tin motion up for what's called a solo 401(k), aliases a self-employed 401(k). Read connected to study what's involved, and really to group 1 up.

Eligibility Requirements

To suffice for a solo 401(k), you must nutrient your income from your ain business. And nan business must beryllium tally by you alone, aliases you and your spouse.

Sole proprietors, mini business owners without labor (except for a spouse), independent contractors, and freelancers typically fresh this description. The business must besides nutrient income. This is verified done your taxation records.

If you meet these criteria, you tin unfastened a solo 401(k) plan.

How to Set up a Solo 401(k)

1. Find Your Broker

You tin unfastened a solo 401(k) astatine astir online brokers and accepted brokers aliases straight done a financial services company. You'll want to do immoderate investigation up of clip to place nan best solo 401(k) institution for you.

2. Get an EIN

3. Choose: Traditional aliases Roth?

To unfastened a solo 401(k) plan, you person to adopt a scheme successful writing, making a written declaration of nan type of scheme you intend to fund. The choices are nan aforesaid arsenic those fixed to an worker opening a 401(k) plan: you tin take a accepted 401(k) aliases a Roth 401(k). Each has chopped taxation benefits.

If you person a accepted 401(k) plan, you're investing pinch pretax dollars. That is, you're efficaciously claiming an contiguous taxation break for your contributions arsenic you make them passim your moving years.

When you scope status age, you'll beryllium income taxes connected nan costs arsenic you retreat them. You'll salary taxes connected your first deposits arsenic good arsenic connected nan money your investments person earned complete nan years.

Keep successful mind that astir group are successful a little taxation bracket aft retiring than they were during their moving years. If you expect being successful a higher taxation bracket, you mightiness upwind up paying a hefty other magnitude successful taxes down nan road.

Roth plans, connected nan different hand, are funded pinch after-tax dollars. Since you've already fixed nan IRS its cut, your withdrawals are tax-free aft you retire, arsenic agelong arsenic you've had nan relationship for complete 5 years. That's wholly tax-free, including nan money you paid successful and nan finance returns nan relationship earned.

This could adhd up to a bully fat slope relationship for your status years. However, support successful mind that it's a bigger deed to your spending powerfulness during your moving years.

4. Create a Trust

Once you person established nan type of scheme you want, you will request to create a trust that will clasp nan costs until you request them aliases you scope status age. You tin prime an investment firm, online brokerage, aliases security institution to administer nan scheme for you.

5. Create a Record-Keeping System

You besides request to found a record-keeping system, truthful that your investments are accounted for properly.

Benefits of a Solo 401(k)

Solo 401(k)s supply immoderate advantages complete different types of status accounts disposable to you.

Roth Option

One large advantage is nan readiness of nan Roth action arsenic good arsenic nan accepted version. With different self-employed status accounts, specified arsenic nan Simplified Employee Pension (SEP) IRA, nan Keogh plan, and nan Savings Incentive Match Plan for Employees (SIMPLE) IRA, only nan accepted action is offered; location are nary Roth options.

The regular IRA that's disposable to anyone pinch earned income is disposable successful Roth aliases accepted versions, but nan yearly publication limits are acold lower.

High Contribution Limits

Another advantage of nan solo 401(k) is that it tin judge contributions from some an worker and an employer. That is, if you person a solo 401(k), you deterioration some hats and tin make contributions successful some roles.

The publication limits are adjusted for inflation each twelvemonth by nan IRS.

With a solo 401(k), you tin lend up to $69,000 for 2024 (up from $66,000 successful 2023) aliases 25% of your adjusted gross income, whichever is lower.

People property 50 and older tin adhd an other $7,500 a twelvemonth arsenic a "catch-up contribution". In different words, successful 2023 you could lend a full of $66,000 ($22,500 arsenic an worker + $43,500 arsenic an employer) on pinch a $7,500 catch-up publication if applicable for a maximum of $73,500 for nan year. In 2024, it's $76,500.

Added Flexibility

The SEP IRA is an replacement status scheme that is often recommended for mini business owners. But nan solo 401(k) has an advantage complete nan SEP: you tin return loans from nan scheme earlier retiring. In general, it's not advisable to get from your status fund, but it's an action if you must.

The solo 401(k) has different advantage complete nan SEP IRA: you get to take betwixt a Roth and a accepted account. The SEP IRA tin only beryllium a accepted account.

Less Paperwork

The solo 401(k) is designed for usage by sole proprietors, freelancers, and independent contractors. As such, it eliminates overmuch of nan paperwork and bureaucracy that spell on pinch setting up and managing a 401(k) successful a corporation.

More Investment Options

You person a world of options to take from successful selecting really to put your money for retirement. Most companies connection their labor a constricted action of costs from a azygous financial services firm. You person nary limits isolated from for a fewer that the IRS imposes. You can't play nan derivatives marketplace aliases put successful stamps aliases comics, for example.

Otherwise, you tin put successful stocks, bonds, communal funds, exchange-traded funds, and galore different types of investments.

Alternatives to a Solo 401(k)

There are fundamentally two options successful summation to nan solo 401(k) for freelancers and independent contractors who want to save for retirement and get nan taxation advantages that travel these IRS-approved options:

• The SEP IRA is designed to beryllium an easy, elastic action for mini businesses pinch employees. It useful overmuch for illustration a accepted IRA but has higher publication limits. The limits are nan aforesaid arsenic for nan Solo 401(k): $69,000 for 2024 (up from $66,000 successful 2023); however, your publication cannot transcend 25% of your gross adjusted income. No catch-up publication is allowed for those property 50 aliases older. No Roth action is available. A SEP IRA tin beryllium opened done immoderate brokerage aliases bank.
• The Keogh Plan is unfastened to sole proprietors, partnerships, and constricted liability companies and is often utilized arsenic a profit-sharing conveyance for master practices specified arsenic doctors' and lawyers' groups. It has nan aforesaid publication limits arsenic nan SEP IRA and nan Simple 401(k) but poses a greater administrative burden. There is nary Roth option.
• The SIMPLE IRA is designed for businesses pinch 100 aliases less employees. It is unfastened to sole proprietors but has a little publication limit than nan Solo 401(k) aliases nan SEP IRA. The maximum publication is up to 3% of net positive $16,000 successful 2024 (up from $15,500 successful 2023). There is nary Roth option.
• Finally, the regular IRA is disposable to each earners. The limit is $7,000 for 2024 (up from $15,500 successful 2023). If you are 50 aliases older, you are allowed a catch-up publication of $1,000.

The Bottom Line

If you are self-employed, you person respective options for redeeming for status while redeeming connected your taxes. You don't person to settee for a regular IRA, which is disposable to anyone pinch earned income but sets nan maximum yearly publication astatine a comparatively debased level.

Instead, you tin opt for 1 of respective types of status plans that person overmuch much generous limits pinch likewise generous taxation benefits. The solo 401(k), nan SEP IRA, nan Keogh plan, and nan SIMPLE IRA each are possibilities.

However, nan solo 401(k) is nan only action that offers you a prime of a Roth relationship aliases a accepted account, while still allowing for nan maximum yearly publication disposable among tax-advantaged status plans.