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Reasons to Start a Solo 401(k)

According to the Bureau of Labor Statistics (BLS) in February, little under 10 million Americans are self-employed. Nearly 10 million Americans have access to a tremendous wealth-building tool called the Solo 401(k) (k).

A Solo 401(k) can help you accelerate your retirement savings plan if you’re self-employed and don’t have any full-time employees. By the end of this post, you’ll have a better grasp of what a Solo 401(k) is, how it operates, and seven reasons why it’s beneficial to open your own account.

What is the difference between a Solo 401(k) and a Traditional 401(k)?

A Solo 401(k), also known as an Individual 401(k), is a retirement plan that is solely available to self-employed individuals who do not have full-time workers. Only if you employ your spouse is there an exemption to this requirement. If that’s the case, you can donate on their behalf as well.

Here are seven compelling reasons to start a Solo 401(k) (k)

1. It’s simple to open an account.

A Solo 401(k) can be established in just a few simple steps. Your Employer Identification Number is all you’ll need (EIN). You can apply for an EIN on the IRS website if you don’t already have one. It is usually assigned in a matter of minutes.

Opening a plan is as easy as locating a broker you wish to work with (in person or online) and filling out a Solo 401(k) account application after you have an EIN. You’ll be asked to sign a plan adoption agreement after that’s done. That’s when the real fun begins.

2. A Solo 401(k) can be tailored to your specific needs.

You’ll have access to the same types of investments as major organisations once your account is up and operating. You’ll be able to invest in precious metals, tax liens, and real estate in addition to regular stocks and bonds. You may tailor your retirement plan to fit your goals and risk tolerance thanks to a plethora of options.

You can also open a Solo 401(k) or a Solo Roth 401(k) account (k). The main difference is that you’ll only have to pay taxes on your Solo 401(k) when you start taking money out. You have two choices with a Solo Roth 401(k):

Pay no taxes on the money now and wait till retirement to pay taxes.

Pay taxes on the funds now, and the money will be tax-free in retirement.

3. Tax benefits

If you choose a regular Solo 401(k) or don’t use the Roth option of a Solo Roth 401(k), your contributions will not be taxed until you start making money in retirement.


Let’s imagine your company makes $60,000 each year and you pay federal taxes at a rate of 22%. Let’s say you wish to deposit $20,000 of your earnings into a Solo 401(k) (k). Instead of paying 22% in federal taxes on $60,000 ($13,200), you’ll only have to pay taxes on $40,000 ($8,800). You immediately save $4,400.

4. Contribution limits that have not been met

The IRS considers you to be both an employee and an employer if you operate a business. That fact alone presents a fantastic chance to maximise your 401(k) contributions (k). Let’s pretend your company brings in $60,000 per year and you want to maximise your contributions.

As an employee, you can contribute up to $20,500 per year.

You contribute 25% of your annual revenue, or $15,000 ($60,000 x 0.25 = $15,000) as the employer.

You save aside $35,500 for retirement in a single year. Furthermore, you can deduct $35,500 from your earned income and pay taxes just on the remaining $24,500.

The more you make, the more you may put aside — up to a maximum of $57,000 every year. If you’d like, you can do the same for a spouse who works full-time for the company.

Bonus: If you’re 50 or older, you can contribute an extra $6,500, bringing your total to $27,000. Your total contribution would be $42,000 if you choose to invest the whole amount as both an employee and an employer.

5. Contribution limits are higher than those of most corporate 401(k) plans.

To be clear, 401(k)s are a wonderful tool for accumulating wealth in general. Let’s compare a Solo 401(k) to a 401(k) supplied by numerous businesses to see how beneficial it can be.

If you contribute the maximum amount each year and your employer matches up to 3%, the math looks like this:

Your donation is $20,500.

Contribution from the employer: $615

$21,115 (or $27,810 if you’re 50 or older) total annual contribution

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6. Business funding is available.

A Solo 401(k) permits you to borrow up to $50,000 of your invested earnings if you ever need money for your business.

7. you may be able to take a hardship withdrawal.

A Solo 401(k) plan allows you to take money out of your retirement account if you meet specific criteria.

One of the numerous problems you confront as a business owner does not have to be saving for retirement. Compound interest can help your nest egg grow even if your initial investments are small.

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