Best Solo 401k Options for Non Owner W2 Employees

If you're a non-owner W2 employee, you're probably familiar with the limitations of traditional 401(k) plans. You're not eligible to participate in your company's 401(k) plan if you're not an owner or executive, which can be frustrating if you're trying to save for retirement.

One way to get around this limitation is to consider a solo 401(k) plan, also known as an individual 401(k) plan. This type of plan is designed for self-employed individuals and small business owners, but it can also be a good option for non-owner W2 employees who want to save for retirement.

Solo 401(k) plans offer higher contribution limits than traditional 401(k) plans, which can be a big advantage for people who want to save aggressively for retirement. In fact, solo 401(k) plans allow you to contribute up to 20% of your income, up to a maximum of $57,000 in 2023.

As a non-owner W2 employee, you may have limited options when it comes to contributing to a retirement plan. However, you can still take advantage of a solo 401(k) plan.

You can contribute up to $23,000 in 2024, with an additional $7,500 in catch-up contributions if you're over 50. This is the employee contribution limit.

You can choose to contribute as traditional pre-tax or Roth post-tax, or both. This gives you flexibility in how you manage your taxes.

If you're over 50, you can contribute up to $30,500 in 2024.

The maximum amount you can contribute as an employer is 25% of your compensation, or approximately 20% if your business is not incorporated.

Here's a breakdown of the contribution limits:

If you're a non-owner W-2 employee, you can contribute to a solo 401k as both the employee and the employer. The maximum amount you can contribute as an employee is $23,000 in 2024, with an additional $7,500 catch-up contribution if you're over 50.

As the employer, you can contribute up to 25% of your compensation, which is approximately $20,000 if your business is not incorporated. However, total contributions between employee and employer must not exceed the solo 401k contribution limit of $69,000 for 2024, or $76,500 if you're 50 or older.

You can choose to contribute to a traditional pre-tax account, which reduces your taxable income for the current year, or a Roth post-tax account, which provides tax-free growth in the future.

Pre-tax contributions are a great way to lower your current tax liability. By making pre-tax contributions, you can reduce your taxable income for the current year, which means you pay less in taxes now.

Pre-tax contributions allow for significant tax savings. For example, if you made $60,000 this year and choose to contribute $20,000 to a pre-tax account, your new taxable income is now $40,000.

Roth contributions provide future tax-free growth. This means that when you make withdrawals from your account in retirement, it'll be completely tax-free.

Pre-tax contributions can also be used in combination with other contribution types, such as after-tax contributions. By understanding and utilizing these various contribution types, you can tailor your 401(k) to meet your retirement savings goals best while optimizing your tax situation.

Here's a breakdown of the benefits of each contribution type:

By understanding the benefits of each contribution type, you can make informed decisions about how to optimize your 401(k) plan and achieve your retirement goals.

For a standard 401(k) plan, the vesting schedule can take three to five years for highly compensated employees to benefit from employer contributions.

This means it can take a while for employees to fully own the employer's retirement plan contributions.

With a Solo 401(k) plan, however, the employer and employee are one and the same, resulting in immediate vesting of 100% of plan contributions up to the contribution limit.

This can be a significant advantage for solo business owners who want to maximize their retirement savings.

A solo 401(k) allows you to mix and match pre-tax and post-tax contributions, giving you flexibility in reducing your taxable income.

You can choose to allocate a certain percentage to pre-tax and the rest to post-tax, making it a flexible choice for your financial goals.

If you're in a high tax bracket today, a pre-tax contribution may make more sense, especially if you believe you won't be in a high tax bracket in retirement.

You can also consider your investment gains when choosing between pre-tax and post-tax contributions.

For example, if you contribute $20,000 to a solo 401(k) and want to maximize Roth contributions, you can put $15,000 into a Roth account and the other $5,000 as pre-tax to reduce your taxable income.

The type of contribution you choose is not an all or nothing decision, and you can adjust your allocation each year.

Here's a comparison chart to help you decide:

Ultimately, the choice between a traditional solo 401(k) and a Roth solo 401(k) depends on your individual financial situation and goals, but it's worth considering the tax implications and flexibility of each option.

One of the most appealing features of a Solo 401(k) is the ability to take a personal loan from your account. You can borrow up to 50% of the account value or $50,000, whichever is lower.

This loan option is a great way to access cash without having to worry about your credit score, making it a low-cost and convenient way to get the funds you need.

A Solo 401(k) and a Roth Solo 401(k) offer distinct tax strategies and withdrawal guidelines, making them powerful tools depending on your financial goals.

Both plans allow self-employed individuals or business owners with no employees, except a spouse, to participate.

Contributions to a Traditional Solo 401(k) are tax-deductible, and withdrawals are taxed in retirement.

Contributions to a Roth Solo 401(k) are after-tax, and withdrawals are tax-free in retirement if requirements are met.

A Traditional Solo 401(k) allows both employee and employer pre-tax contributions, but withdrawals are taxed as ordinary income in retirement.

A Roth Solo 401(k) also allows both employee and employer pre-tax contributions, but employee deferrals are after-tax; employer contributions are pre-tax, and withdrawals are tax-free if requirements are met.

Required Minimum Distributions (RMDs) start at age 73 for a Traditional Solo 401(k), but there are no RMDs for a Roth Solo 401(k).

Here's a comparison chart to help you determine which plan aligns best with your retirement needs:

You can borrow money from your 401(k) account through a personal loan, and the rules allow for a loan of up to 50% of the account value or $50,000, whichever is lower.

This type of loan is a great option because it doesn't depend on your credit score, so you can get the loan even if you have poor credit.

As a non-owner W-2 employee, you're likely curious about the investment and tax implications of a Solo 401(k). Traditional Solo 401(k) contributions are tax-deductible, but withdrawals are taxed in retirement.

The tax advantages of a Roth Solo 401(k) include after-tax contributions and tax-free withdrawals in retirement. However, employer contributions are pre-tax and taxed when withdrawn.

Required Minimum Distributions (RMDs) are a key consideration for traditional Solo 401(k) plans, starting at age 73. On the other hand, Roth Solo 401(k) plans have no RMDs.

Here's a summary of the key differences in investment and tax considerations between traditional and Roth Solo 401(k) plans:

Profit-sharing contributions can be made to both traditional and Roth Solo 401(k) plans, but the tax implications differ. For traditional plans, up to 25% of compensation is tax-deductible for the business. For Roth plans, employer contributions are pre-tax and taxed when withdrawn.