Solo 401k plans are designed for entrepreneurs, contract workers and the self-employed who have no employees other than a spouse, and there can be big benefits to using this type of plan. Participants can self-direct their money and investments, there are generous contribution limits, and there are minimal tax filing requirements. It offers all of the benefits of a traditional plan as well as some additional benefits. The generous contribution opportunities are what will be discussed herein.
Solo 401k Contributions for 2019-20
For 2019 the maximum amount a self-employed individual can contribute to their Solo 401k is $56,000 if he or she is younger than age 50. Individuals 50 years of age and older can “catch-up” with an additional $6,000 per year in contributions. Part of the appeal is that contributions can be made as both the employer and employee.
In 2020, the Solo 401k contribution limit will increase to $57,000 (under age 50) and $63,500 for individuals over 50 years old.
Two Types of Solo 401k Contributions
As the employee you can contribute $19,000 (under age 50) or $25,000 (over 50 years of age) for 2019. This amount can be the full amount you earn, and made on a pre-tax basis.
Additionally, you can contribute up to 20% of your net self-employment income as the employer, which is also made with pre-tax dollars. Your contributions as both employer and employee can quickly add up.
Your Solo 401k limits apply per person, rather than by plan. So it’s important to know your individual contributions. Some Solo 401k providers also offer a Roth 401k option, but this requires investment on an after-tax basis. Those would be tax-free in retirement.
Who Can Get Started?
If you generate some form of self-employment income, you can (and should) establish a Solo 401k plan. Even if that self-employment income is a side gig in conjunction with a regular 9-to-5, you qualify. Establishing a Solo 401k is a great way to maximize your retirement savings if you were late in getting started. It will also benefit investors who are uncomfortable making traditional investments.
How to Get Started:
To establish a Solo 401k, set up an application with your Self Directed 401k provider. You must have an Employee Identification Number (EIN). As you contribute more and more to your plan, you may need to fill out additional paperwork. Be aware of any fees a plan custodian may charge so you know what your true cost is, and then begin building your retirement savings for yourself.