A Good Deal for Self-Employed: Solo 401 (k)

By Brett Melson Tuesday, April 21, 2015

401k retirement tax breakAre you self-employed and looking to start a Solo 401(k) retirement plan for the future? 401(k) plans let participants save and invest a portion of their earnings before taxes are taken out. No taxes are paid on the money until it is withdrawn, usually at retirement when the worker’s tax bracket is lower. 

If you are an independent contractor, consultant, freelancer, real estate agent, or other self-employed person, the government offers an annual $53,000 tax break that could help secure your retirement. 

For this Solo 401(k) plan, the business owner wears two hats, employee and employer. Contributions can be made for both, resulting in very high contribution limits. The benefit is even more for married business owners because spouses are the exception to the “solo” or “one worker” rule and can make contributions equal to those of the owner. 

Using this advantage married couples could put away $106,000 annually, tax-deferred. Solo-k plans are best suited for self-employed workers who want to save as much as possible for retirement, and who make enough to make significant contributions. If, however, the plan is to grow the company and hire employees, it would have to be converted to a full-blown 401(k) plan.

To qualify for a Solo-k an individual must be able to claim self-employed income, but have no full-time employees (except a spouse). However, a person does not need to work full-time in the self-employed capacity. Many times an individual works for an employer, but has another business on the side, making that business eligible for adopting a Solo 401(k). 

The plan can be adopted by any self-employed business, including a sole proprietorship, limited liability company, partnership, S-Corporation, C-Corporation, etc.

The two basic types of this plan are self-directed, and brokerage based. The brokerage based plans invest in stocks and mutual funds, while the self-directed plans allow the entrepreneur to use retirement funds to make virtually any type of investment on their own.

The IRS describes only the types of investments which are prohibited, which are few. Varied options such as real estate, private business investments, precious metals, and loans give the holder many options. 

Another advantage of the Solo-k is that it allows a business owner to take out a loan on the retirement account. A participant is allowed to borrow up to 50% of the total value, or $50,000, whichever is less. This loan is tax free and can be used for any reason. (Failure to make payments back can result in taxes and IRS penalties, however.) 

There is an additional feature for those 50 years old and over. They can contribute an additional $6,000 beginning this year, often referred to as a “catch-up” feature. So the upper limit in 2015 for a business owner over 50 would be $59,000.

Many people are unaware of this Solo-k plan which allows for self-employed workers to invest a good amount of tax-deferred income, with less hassle to set up than many other retirement plans. It beats traditional corporate 401(k)s in higher savings limits and in the ability to invest in a variety of options.

At Harvard Business Services we feel this would be a great fit for a large portion of our clients. We have formed a Strategic Relationship with Provident Trust Group to assist with the setting up of a Solo 401K, reach out to them directly at 855 279 5981 with any questions.

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*Disclaimer*: Harvard Business Services, Inc. is neither a law firm nor an accounting firm and, even in cases where the author is an attorney, or a tax professional, nothing in this article constitutes legal or tax advice. This article provides general commentary on, and analysis of, the subject addressed. We strongly advise that you consult an attorney or tax professional to receive legal or tax guidance tailored to your specific circumstances. Any action taken or not taken based on this article is at your own risk. If an article cites or provides a link to third-party sources or websites, Harvard Business Services, Inc. is not responsible for and makes no representations regarding such source’s content or accuracy. Opinions expressed in this article do not necessarily reflect those of Harvard Business Services, Inc.

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There is 1 comment left for A Good Deal for Self-Employed: Solo 401 (k)

Floyd Kramer said: Friday, June 12, 2015

Thank You

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