What is a Solo(k)
A Solo 401(k), also known as an Individual 401(k) or a One-Participant 401(k), is a retirement savings plan designed specifically for self-employed individuals or small business owners who have no employees other than themselves and, if applicable, their spouses and/or partners. This plan allows these individuals to save for retirement by making both employee (salary deferral) and employer (profit-sharing) contributions to the account.
Benefits of a Solo(k)
High contribution limits: The plan allows for higher contribution limits compared to other retirement plans, such as SEP-IRAs or SIMPLE IRAs. Contribution limits for a Solo 401(k) are based on the combined total of employee and employer contributions, subject to annual IRS limits.
Tax advantages: Contributions to a traditional Solo 401(k) are made with pre-tax dollars, meaning that they reduce your taxable income for the year. Your investments grow tax-deferred until you begin making withdrawals in retirement, at which point they are taxed as ordinary income. Alternatively, you may opt to contribute to a Roth Solo 401(k), which allows for after-tax contributions, with qualified withdrawals being tax-free in retirement.
Flexibility: The Solo 401(k) plan can be tailored to suit the individual’s needs, allowing for a range of investment options and the potential to take loans from the account, subject to certain rules and restrictions.
Easy administration: Solo 401(k) plans generally have less complex administration requirements compared to traditional 401(k) plans for larger businesses, as they are not subject to certain provisions of the Employee Retirement Income Security Act (ERISA), such as nondiscrimination testing.