Last Updated on September 29, 2020
IRA Financial’s Adam Bergman discusses the Solo 401(k) contribution rules and how you can super-save for retirement if you are self-employed.
In This Podcast
If you are self-employed, the best retirement plan option available for you is the Solo 401(k). The only eligibility requirements to open one is the presence of self-employed income and the absence of full-time employees (other than a spouse or partner). Therefore, if you are a sole proprietor or have an owner-only business, you can open and fund the Solo 401(k).
One of the main benefits of the Solo 401(k) plan are the contribution limits. Contributions can be made with pre-tax money (reducing your taxable income) or after-tax funds (tax-free qualified distributions). No matter which way you fund the plan, the tax advantages are essentially the same. All funds and assets held within the 401(k) grow without taxes. In the case of a traditional 401(k), they are deferred until you withdraw during retirement. And, as we just mentioned, Roth assets grow without taxes and are not taxable during retirement, so long as the account has been open five years and you are at least age 59 1/2.
This podcast focuses on one way of funding the plan – contributions. Whether you make pre- or after-tax contributions, you are limited in how much you can put into the plan each year. Further, there are two ways to contribute – as the employer and as the employer. Both “hats” are included into those limits.
As the employee with a Solo 401(k), you may contribute up to $19,500, plus an additional $6,500 if you are at least age 50. This is similar to any workplace retirement plan you may have had. Additionally, you may contribute up to 20 or 25% of your income (depending on the type of business you have), up to a combined limit of $57,000 or $63,500 if age 50 or older. It’s important to note, that this limit is for all of your 401(k) plans and not a per plan limit. If you have one Solo 401(k), two different 401(k) plans, or some combination, the limit is the same.
Also in the podcast, Mr. Bergman compares the Solo 401(k) to the popular SEP IRA, and why he feels the Solo is by far the better choice. He also talks about some of the other benefits of the plan and some complexities of it.
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Join us next episode as Mr. Bergman discusses the IRA custodian, and why you should carefully select one, especially if you want to invest in alternative assets.