There are certainly downsides to “going it alone” in your business. To name a few: You assume all of the risk, pay taxes as an owner and employee, and have to do all of the work yourself.
However, if you decide to follow the path of self-employment, there are unique perks available to you: perhaps the most appealing of all being the ability to start a solo 401k retirement plan.
What is a Solo 401k?
A solo 401k is a retirement plan available exclusively to self-employed individuals. The plan tends to be extremely attractive to those who are self-employed, as it enables you to contribute to your retirement plan as both an employee and as an employer.
Why Should You Consider Starting a Solo 401k?
There are two main reasons why you as a self-employed worker should strongly consider a solo 401k:
- Tax Implications. With a solo 401k, you are afforded the highest contribution limit when contrasted with other retirement plans available to self-employed individuals. This allows for outstanding tax deduction possibilities. Additionally, you have the option to pay your taxes at the time of withdrawal (traditional solo 401k) or you may choose to go the route of the “Roth” solo 401k, where you pay taxes early, but can reap the benefit of a tax-free withdrawal when you retire.
- Loan Considerations. In almost all situations, you want to let your retirement fund grow without touching it. However, when difficult times arise and you really need the money, you are able to withdrawal the lesser of $50,000 or 50% of the plan value.
How Much can a Self-Employed Individual Contribute Using a Solo 401k?
Because you are contributing to your retirement in a two-fold manner, you can potentially contribute over $57,000 per year to your plan in combined amounts. If you’re over the age of 50, you have the ability to add even more to your solo 401k per year, to the tune of $6,500.
What is the Process for Starting a Solo 401k?
The process of opening a solo 401k is simple three step process:
- Select Your Solo 401k Provider.
- Complete the Forms as Indicated by Your Provider.
- Start Investing However You Desire.
What Should You Account for When Choosing a Solo 401k Provider?
There are a number of considerations you’ll want to make when selecting your solo 401k provider. These include:
- Price of Plan. Ensure that your plan has clear, transparent costs that won’t catch you by surprise later on.
- Ease of Set-Up and Plan Maintenance. How much time and effort do you really want to devote to this portion of your business? Set-up and maintenance should be straightforward and free from confusing options and tools.
- Responsive Customer Service. When something goes wrong, you should know that someone will be available to help you out ASAP. The option to communicate with customer support through multiple mediums such as phone, chat and email is also something to look for when selecting your provider.
- You will want a plan where you can have flexibility in your choices.