What is a Solo 401(k)?
A Solo 401(k) is a retirement savings plan tailored for self-employed individuals and business owners with no full-time employees, except for a spouse. It allows them to save for retirement while enjoying significant tax benefits. This plan combines features of both a traditional 401(k) and a self-directed IRA, making it a versatile option for individual entrepreneurs.
Key Features
- High Contribution Limits: Solo 401(k) plans allow for substantial contributions. For 2023,/self-employed individuals can contribute up to $22,500 as an employee, plus an additional $7,500 if they are aged 50 or older. As an employer, they can contribute up to 25% of their compensation, capping total contributions at $66,000 or $73,500 if over 50.
- Tax Advantages: Contributions can be made on a pre-tax basis, lowering the individual’s taxable income for the year. Alternatively, individuals can opt for a Roth Solo 401(k), allowing for tax-free withdrawals in retirement.
- Investment Flexibility: Solo 401(k) plans offer a wide array of investment options, including stocks, bonds, mutual funds, and real estate. This flexibility empowers investors to tailor their portfolios according to their risk tolerance and financial goals.
Who Should Consider a Solo 401(k)?
This plan is ideal for self-employed professionals, freelancers, and small business owners who wish to maximize their retirement savings while maintaining control over their investments. By taking advantage of a Solo 401(k), individuals can effectively plan for a secure financial future while optimizing their Social Security benefits.