Solo 401(k) Saving Tips
Saving for Retirement
You may think you’re too young to think about retirement, but it’s never too early to start saving for your Golden Years. According to Adam Bergman, founder of IRA Financial and former tax and ERISA attorney, you should start saving “as soon as possible.”
As soon as you start earning money, set a small portion aside for the future. If you earn a small salary at 20, there’s no harm in setting aside $10/month toward your retirement – only gains.
Saving with a Solo 401(k)
Being a self-employed individual comes with many advantages. Yet one crucial disadvantage is the lack of retirement savings options. Being self-employed, you can no longer contribute to an employer’s 401(k) plan. Of course, there is the SEP IRA.
SEP stands for Simplified Employee Pension. It is an individual retirement account for small business owners and self-employed individuals and has no immediate tax requirements.
Like the case of a traditional IRA, you benefit from tax-deferral – essentially, you pay when you withdraw at the age of retirement. The SEP IRA certainly has more benefits for self-employed individuals than a 401(k) Plan.
But there’s also the Solo 401(k).
What is a Solo 401(k)?
A Solo 401(k) – also called the One-Participant 401(k), Individual 401(k) and Self-employed 401(k) – is a retirement savings vehicle for self-employed and small business owners with no full-time employees. You will benefit most from these Solo 401(k) saving tips if you’re a sole-proprietor, contractor, independent consultant or freelancer. In other words, you benefit most if you earn money through self-employment.
The Solo 401(k) Plan is similar to a traditional 401(k). As a participant, you make contributions into your plan with pre-tax income. From there, you can make a variety of investments to grow the funds in your 401(k), tax-deferred. However, with a Solo 401(k) you act as both employer and employee and can set aside money as both.
Solo 401(k) vs SEP IRA
First, there is the elective-deferral contribution. This allows you to make a contribution as an employee. The second contribution is the employee deferral. It allows the business to make contributions into the Solo 401(k). As opposed to a SEP IRA, contributions to a Solo 401(k) are higher. The plan is also more cost-effective and easier to administer. Compare the Solo 401(k) to the SEP IRA.
The “Golden Key” is to Start Young
No matter what retirement account you establish, starting young is the key to retiring wealthy. Adam Bergman, founder of IRA Financial, says that taking advantage of your age is one of the golden keys to help you create retirement wealth.
Let’s see that in action with the Solo 401(k) Plan.
Meet Mary Jaze
Mary Jaze is 25 and the owner of MJ’s Treats, an upscale vegan bakery. Her business is doing better than she ever imagined, and now she wants to start investing. Mary Jaze doesn’t know much about stocks or bonds, so she decides to establish a Self-Directed IRA for more investment opportunities.
Being a small business owner with zero full-time employees, she chooses the Solo 401(k). After watching Using a Solo 401(k) Plan to Invest in Real Estate, she now wants to use her retirement account funds to make real estate investments.
Each month, she sets aside $1,000 for her Solo 401(k). That’s $12,000 a year. She does this every month until retirement age: 70.
Current Age: 25
Starting Solo 401(k) Balance: $0
Expected Rate of Return: 7%
If MJ goes along this path until she’s 70, she will have $3,197,037 with a pre-tax Solo 401(k). That’s retirement wealth in a nutshell.
Meet John Dole
John Dole is 50 and has worked at a marketing company for 28 years. Last year, he decided to start his own digital marketing company, and since then, it has taken off. Unfortunately, being self-employed, he can no longer contribute to his employee sponsored 401(k) plan.
After much research, he decides to establish a Solo 401(k), as it looks more appealing than the SEP IRA. Like Mary Jaze, he uses his retirement funds to invest in real estate, an asset he understands.
Again, like Mary Jaze, he sets aside $1,000 every month until he reaches 70.
Current Age: 50
Starting Solo 401(k) Balance: $0
Expected Rate of Return: 7%
If JD goes along this path until the age of 70, he will have $487,539 with his pre-tax Solo 401(k).
Both MJ and JD did everything the same: they retired at the same age, their annual contribution was the same amount, and even the expected rate of return was the same. What was the main difference? Mary Jaze started younger.
Numbers don’t lie. When you start investing early for your retirement, you will achieve retirement wealth. Not only is this number one of our Solo 401(k) saving tips, but the number one tip for any retirement vehicle you choose.
Solo 401(k) Saving Tips
We’re going to provide you with a few Solo 401(k) saving tips that you can apply if you qualify for the plan.
- The plan offers higher contribution limits than other individual plans, such as an IRA. ($55,000 for 2018 and $56,000 for 2019 plus a $6,000 catch-up for participants who are 50 and older).
- One of the most valuable of the Solo 401(k) saving tips is, the plan allows you to invest in anything the IRS permits, like real estate. There’s no guarantee that your investments will always be successful, but investing in an asset you understand is a good place to start.
- Here is another of our Solo 401(k) saving tips you should take into consideration: Checkbook Control. Checkbook control gives you the freedom to invest when you want. No custodian consent necessary. Additionally, there are no custodian fees.
- With a Solo 401(k), there are no tax filing requirements until the account balance reaches $250,000. When you reach this amount, you simply file the IRS Form 5500 EZ.
- There is a loan option, which is highly advantageous because if you’re self-employed, you’re less likely to secure a loan. The loan is up to $50,000 (or half the account balance – whichever is less). Because it’s not a withdrawal, the Solo 401(k) loan is tax and penalty-free. You can use it for anything: invest in your business or pay off debt.
- The Solo 401(k) offers a Roth option so you can make contributions with after-tax dollars. That way, once your investments grow, you don’t have to pay taxes when you make a withdrawal on a distribution.
- The last of our Solo 401(k) saving tips is the UBTI exemption. If you use an IRA to invest in real estate, you pay taxes on UDFI. Therefore, if you want to use your retirement funds to invest in real estate, the Solo 401(k) is the better option.
If you’re self-employed or a small business owner and you don’t know which plan is right for you, take these Solo 401(k) Saving Tips into consideration.
Advantages of Establishing a Self-Directed IRA (SDIRA)
Did you know that a Solo 401(k) is a type of Self-Directed IRA? But what is a Self-Directed IRA?
A Self-Directed IRA is an individual retirement plan that gives you more control over your investments. Additionally, it provides investment diversity. Rather than making investments in the Stock Market, you can make alternative asset investments. These include real-estate, tax-liens and precious metals.
When you establish a Self-Directed IRA with a Self-Directed IRA custodian, such as IRA Financial Trust, you receive checkbook control.
“Checkbook Control” is when you, the owner of the IRA, has complete jurisdiction over your retirement account. First, you must establish a Self-Directed IRA LLC. This creates freedom to make investments without custodian consent.
A SDIRA doesn’t have an active custodian; it has a passive custodian. In other words, the passive custodian never provides investment advice, but efficiently administers the account.
You are in control of your investment decisions, which means you have more responsibility when establishing a Self-Directed IRA.
IRA Financial Group was created to help retirement account holders take control over their IRA. Founder, Adam Bergman, noticed that many account holders were not aware they could self-direct their retirement account. IRA Financial gives clients the freedom to invest in almost any time of investment.
With nearly a decade of experience, the team of tax and ERISA specialists have helped 12,000 clients invest $3 billion in alternative assets.
When you’re ready to self-direct your retirement account, such as a Solo 401(k), contact IRA Financial to get you started.
Q for You
As a self-employed individual or small business owner, which plan would you choose? The Solo 401(k) or SEP IRA?