Solo 401(k): The Ultimate Retirement Plan for Self-Employed Individuals
As a self-employed individual, you’re the CEO of your own retirement — which means you want to maximize every opportunity to secure your financial future. While traditional retirement plans may not offer the flexibility and contribution limits you need to achieve your retirement goals, a Solo 401(k) does. This powerful retirement savings vehicle is designed for self-employed individuals and small business owners, offering unique advantages that we’ll review in this article.
But first, let’s meet Ben, a 51-year-old self-employed entrepreneur who understands the importance of maximizing his retirement savings. Last year, Ben earned $50,000 from his S Corporation. By utilizing his Solo 401(k) to its full potential, he contributed $38,500 — a combination of employee and employer contributions — significantly reducing his taxable income and setting himself up for a comfortable retirement.1
Ben is one of the growing number of Americans embracing self-employment. In fact, over 10% of the U.S. workforce is self-employed.2 If you’re among this entrepreneurial group, it’s important to be proactive about your retirement planning. Here are some tips to help you understand and maximize your Solo 401(k).
The Benefits of Solo 401(k) Contributions
The Solo 401(k) stands out from other retirement plans due to its unique combination of benefits, which include:
- Higher Contribution Limits: One of the most significant advantages of a Solo 401(k) is its generous contribution limits. Compared to traditional IRAs, which limit contributions to $7,000 in 2024 ($8,000 if age 50 or older), a Solo 401(k) allows for substantially higher contributions. This means you can shelter more of your income from taxes and accelerate your retirement savings.
- Dual Contributions: With a Solo 401(k), you wear two hats: employee and employer. This allows you to make contributions in both capacities, increasing your savings potential. As an employee, you can contribute up to $23,000 in 2024 ($30,500 if age 50 or older). As an employer, you can contribute up to 25% of your net adjusted self-employed income.
- Tax Advantages: Solo 401(k)s offer significant tax benefits. Contributions reduce your current taxable income, leading to immediate tax savings. Furthermore, your investments grow tax-deferred, meaning you won’t pay taxes on your earnings until you withdraw them in retirement. You can even opt for a Roth contribution.
- Flexibility: Solo 401(k)s provide a wide range of investment options. You can invest in stocks, bonds, mutual funds, ETFs, and even alternative investments like real estate, giving you the freedom to tailor your portfolio to your risk tolerance and financial goals.
- Control: As the sole participant in your Solo 401(k), you have complete control over your investment choices. This empowers you to make informed decisions and manage your retirement savings according to your individual needs and preferences.
Maximizing Contributions Before Year-End
With the end of the year rapidly approaching, now is the time to review your Solo 401(k) contributions and make adjustments to maximize your savings for 2024. Keep in mind that the employee contribution is up to $23,000 and employer contribution is up to 25% of your net adjusted self-employed income. With the total contribution limit set at $69,000, here are some strategies to make the most of those contributions:
- Calculate Your Employer Contribution: To determine your maximum employer contribution, calculate 25% of your net adjusted self-employed income. This can be done with the help of a tax professional or by using online calculators.
- Take Advantage of Catch-Up Contributions: If you’re 50 or older, don’t forget to utilize the catch-up contribution provision, allowing you to contribute an additional $7,500.
- Adjust Contributions Throughout the Year: If your income fluctuates, consider adjusting your contributions throughout the year to ensure you’re maximizing your savings potential.
Actionable Steps
Finally, here are a few steps to maximize your Solo 401(k) contributions:
- Log in to your Solo 401(k) account and review your current contribution rate.
- Determine how much more you can contribute this year. Use a Solo 401(k) calculator or consult with a financial advisor to assess your options.
- Contact your plan provider to increase your contribution rate. Many providers allow you to make adjustments online or over the phone.
- Set calendar reminders for future years to ensure you’re consistently taking advantage of this valuable retirement savings tool.
If you’re self-employed like Ben, contact us today for a free consultation to discuss your Solo 401(k) options. We offer comprehensive financial planning as well, as outlined in this resource. Reach out if you have any questions.
