Carry Solo 401k and Max Out Your Retirement Savings

Carrying a solo 401k can be a game-changer for your retirement savings. With a solo 401k, you can contribute up to 20% of your net earnings from self-employment, plus an additional 20% from profit-sharing, totaling up to $57,000 in 2022.

You can also contribute an additional $6,500 if you're 50 or older, bringing your total to $63,500. This is a significant increase from the $6,000 allowed in a traditional IRA.

The solo 401k plan allows for Roth and after-tax contributions, giving you more flexibility in how you save for retirement. By carrying a solo 401k and maxing out your contributions, you can build a substantial nest egg for your golden years.

Setting up a solo 401k is a relatively straightforward process. You can open a solo 401k at most online brokers, though you'll need an employer identification number.

You'll need to complete a plan adoption agreement and an account application. Once you've done that, you can set up contributions. Many online brokers offer a wide range of investment options, including mutual funds, index funds, exchange-traded funds, individual stocks and bonds.

To make a contribution for this year, you must establish the plan by Dec. 31 and make your employee contribution by the end of the calendar year. You can typically make employer profit-sharing contributions until your tax-filing deadline for the tax year.

Some online brokers may offer additional services, such as online planning tools or telephone assistance, to help you pick the right mix of investments for your plan. You'll also want to keep detailed records of your contributions and investment choices.

Here's a quick rundown of the key steps to setting up a solo 401k:

The contribution limits for a solo 401(k) are quite generous, especially for self-employed individuals. According to the IRS, the total contribution limit for 2024 is $76,500 for those 50 and over, and $69,000 for those under 50.

You can contribute up to $23,000 as an employee, and an additional $7,500 if you're 50 or older. As the employer, you can contribute up to 25% of your compensation. These contributions can add up quickly, and if you're an independent consultant, you could potentially set aside $48,000 in one year.

Here's a breakdown of the contribution limits:

Keep in mind that these limits are subject to change, so be sure to check the IRS website for the latest information.

If you're self-employed, you're likely curious about contribution limits for your retirement savings. The good news is that self-employed 401(k) plans offer generous contribution limits, especially for those over 50. As an employee, you can contribute up to $23,000 in salary deferral contributions, or 100% of your compensation, whichever is less.

If you're 50 or older, you can add an extra $7,500 in catch-up contributions each year. This brings the total possible contribution to $30,500. As the employer, you can also make a contribution of up to 25% of your compensation each year.

Here are the total contribution limits for self-employed 401(k) plans: $76,500 for those 50 and older, and $69,000 for those under 50. These limits include catch-up contributions for those 50 and older.

To give you a better idea, let's say you're an independent consultant under 50 with $100,000 in compensation. You could elect to defer up to $23,000, and as the employer, you could contribute $25,000 more based on your compensation minus business expenses and self-employment taxes. In total, you could set aside $48,000 in one year to help build your retirement nest egg.

It's also worth noting that self-employed 401(k) contributions may make you eligible for added tax breaks. If your business is not incorporated, you can generally deduct contributions for yourself from your personal income. If your business is incorporated, you can count the contributions as a business expense.

Here's a summary of the key contribution limits for self-employed 401(k) plans:

Contributions to a Solo 401(k) can be made up to the deadline for the prior tax year, which is often in September or October.

Employee salary deferrals must be elected by the end of the year, and the actual dollars must be contributed by the individual tax filing deadline of the following year, including extensions.

For employee salary deferrals, the contribution deadline to make 2022 contributions is April 18, 2023, or October 16, 2023 with a properly filed extension.

Employer profit-sharing contributions can be made through the employer tax-filing deadline of the following calendar year with extensions.

Sole proprietorships and C-Corps have a contribution deadline of October 16, 2023, if an extension is filed, while Partnerships and S-Corps have a contribution deadline of September 15, 2023, if an extension is filed.

If you open a Solo 401(k) but plan to make prior year contributions, it's best to consult a tax professional to ensure you're meeting all the necessary requirements.

A solo 401(k) is a type of retirement plan designed for self-employed individuals with no employees other than their spouse. It's a simplified version of a standard 401(k) plan, with lower fees and fewer administrative requirements.

To set up a solo 401(k) plan, you can work with a financial institution that administers 401(k) plans, and you'll need an employer identification number. You can choose from a range of investment options, including mutual funds, stocks, bonds, ETFs, and CDs.

The plan allows for flexible contributions, which can be increased in good years and reduced in times of financial need. There's no annual minimum contribution requirement, giving you more control over your savings.

A Solo 401(k) plan is a type of 401(k) plan designed for self-employed individuals with no employees other than their spouse.

It's exempt from nondiscrimination testing, which is a complex requirement that larger 401(k) plans must follow.

Solo 401(k) plans allow participants to make contributions as both the employee and employer, making for a powerful savings combination.

This flexibility in timing and amount of contributions makes Solo 401(k) plans a popular choice among eligible small business owners.

Solo plans are easy to administer, which is a major advantage for business owners who may not have a large team to handle plan management.

Business owners and their spouses can make substantial contributions to their Solo 401(k) plan, up to the IRS 415(c) limit annually.

Opening a retirement account can be a daunting task, but it's a crucial step towards securing your financial future. You can set up a self-employed 401(k) plan through a financial institution that administers 401(k) plans.

These plans are simpler to administer and often have lower fees, with some institutions not charging any setup or maintenance fees. When reviewing potential plans, make sure to be aware of all applicable fees before signing up.

You may also want to look for a plan that offers a wide range of investment options, including mutual funds, stocks, bonds, ETFs, and CDs. Some institutions offer online tools or telephone assistance to help you pick the right mix of investments for your plan.

To open a solo 401(k), you can visit most online brokers, though you'll need an employer identification number. The broker will provide a plan adoption agreement for you to complete, as well as an account application.

Here are some key steps to follow:

Once your plan is up and running, be sure to keep detailed records of your contributions and investments. There is no annual minimum contribution requirement, so you can increase contributions in good years and save less during times when you need more cash for your business.

A solo 401(k) offers a nice tax advantage: you can choose between a traditional 401(k) or a Roth solo 401(k). The traditional 401(k) reduces your income in the year you make contributions, but distributions in retirement will be taxed as ordinary income.

If you expect your income to be higher in retirement and/or tax brackets to be higher in the future, a Roth solo 401(k) is a better option, as it allows you to take distributions in retirement tax-free.

The IRS has strict rules about tapping into the money you put into either type of account: you'll pay taxes and penalties on any distributions before age 59 ½, with few exceptions.

You can set up a self-employed 401(k) plan through a financial institution that administers 401(k) plans, which typically involves no setup or maintenance fees for a solo plan.

It's essential to review potential plans and be aware of all applicable fees before signing up, as well as look for a plan that offers a wide range of investment options.

Here's a quick rundown of the tax benefits of a solo 401(k):

Most 401(k) providers charge low fees for solo plans given their basic requirements. You can expect to save on setup and maintenance fees, which can be a significant cost savings.

Some solo 401(k) providers may not allow popular features like participant loans or in-service distributions, so it's essential to review the plan's design before signing up. This could be a deal-breaker for some business owners.

If you have a high income, consider making "mega back door" Roth IRA contributions to a solo 401(k) plan. This tax strategy can help you save for retirement and reduce your tax liability.

Most 401(k) providers charge low fees for solo plans, but some won't allow popular features like participant loans or in-service distributions to maximize their profit.

You'll want to carefully review the plan's features and fees before signing up, so make sure to ask questions and seek clarification on any concerns.

A solo 401(k) plan can only cover business owners and their spouses, and it's essential to ensure that you meet the solo requirement to avoid IRS penalties.

If you have a high income, consider making "mega back door" Roth IRA contributions to a solo 401(k) plan, which involves contributing a significant amount of voluntary after-tax contributions and then rolling them to a Roth IRA for tax-free distribution in retirement.

Be aware that some solo plans won't allow this strategy, so it's crucial to choose a plan that accommodates your needs.

The deadline to adopt a new Solo 401(k) plan has been extended thanks to the SECURE Act of 2019 and 2022.

You can open a Solo 401(k) as late as the tax-filing deadline of the taxpayer/entity, including extensions, which can be as late as September or October of the following year.

To make employee salary deferrals for the first plan year, the plan needs to be in existence by December 31.

The deadline for contributions depends on the contribution type, with employer profit-sharing contributions having more flexibility.

The contribution deadline to make 2022 employee salary deferrals is April 18, 2023 or October 16, 2023 with a properly filed extension.

Sole proprietorships and C-Corps have a contribution deadline of October 16, 2023 (if an extension is filed), while Partnerships and S-Corps have a contribution deadline of September 15, 2023 (if an extension is filed).

If circumstances change and you need to hire employees, your Solo 401(k) plan can be modified or converted to accommodate the new employees.

You have several options, depending on your business needs. The Solo 401(k) can be dissolved and rolled over into a Traditional or Roth IRA maintained by the business owner.

A safe harbor 401(k) plan is another option, which requires a minimum contribution amount to all employees but exempts you from annual nondiscrimination testing.

New employees can also impact your plan design, and you may want to consider options like "New Comparability" Profit-Sharing plans and/or "Defined Benefit" Pension plans if there's a significant age gap between you and your employees.

These plans allow you to set aside more dollars for your retirement, but they come with different rules and requirements.

Here are some possible next steps to consider: