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What is a Solo 401k?

Retirement Planning

July 9, 2021

Are You a Small Business Owner or Independent Consultant?

If so, there is a flexible retirement account that could be advantageous to you. It is a solo 401k, or an individual 401k, and resembles one offered at a large company. According to many large investment companies, this not-so-well-known account offers super high savings potential with tax advantages.

What exactly is a solo 401k?

In simple terms, it offers those who are self-employed with no employees a way to save for retirement. It provides tax advantages by allowing for pre-tax contributions. To avoid confusion, it can also be referred to as the following:

One-participant 401k
Individual 401k
Self-employed 401k
Independent 401k

Important note: this type of account does not help to avoid paying self-employment tax.

Are you the employer or employee?

With this type of account, the answer is both. The high savings potential is all the appeal of this account. You can actually set aside more money than in a traditional 401k or small business account since you own the role of the employer and the employee. You must be responsible for the earned income in the business. There is one helpful exception – a business owner’s spouse can participate as well.

How can a solo 401k be set up?

Since these plans only involve well, yourself, they don’t require complex administration. You might want to check fees and investment options when searching for the right company or broker to hold your account. There are no age or income restrictions.

Select an institution that offers this plan and create an account or adopt the plan
Use your EIN or Employer Identification Number (a Social Security Number may not be used.)
A solo 401k needs to be set up by December 31 in the tax year for which you are making the contributions.

If you have questions about setting up a solo 401k, reach out to Bayntree, as we can help steer you in a good direction.

For 2021, as an employee, you can make salary deferral contributions of:

$19,500 or 100 percent of your compensation, whichever is equal to the lesser

For those over 50, these maximums are a bit higher, as catch-up contributions are allowed. The catch-up amount is $6,500.Then, as the employer, you can contribute up to 25 percent of your compensation each year, up to a maximum of:

$58,000 in combined contributions in 2021(in other words, $19.500 as an employee plus $38,500 as an employer)

For those over 50, the combined employee and employer annual contribution maximum is $64,500 for 2021.

When can you withdraw money?

The goal of this type of account is to save for retirement. So, like a traditional 401k, it is not penalty-free to take money out before retirement.

Withdrawing before age 59.5 may be subject to a 10 percent penalty, plus income taxes
RMDs are required at age 72

You may be eligible to take a hardship withdrawal from this type of account. Although borrowing from your retirement account is not really advised if you can avoid it, given penalties. Check with your financial professional for specifics on loans when opening your account.

What happens if you add employees later?

If you do add employees later, you will have to convert your solo 401k into a different retirement account or terminate it. Until then, you can take advantage of the high savings options for retirement planning.

Do you think a solo 401k might be a good fit for you? Do you have any retirement plan questions? Please schedule an appointment on Bayntree’s online calendar by selecting the date and time that is most convenient for you! You can also always reach us by emailing info@bayntree.com.

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Bayntree Wealth Advisors provides comprehensive financial planning and wealth management. The Bayntree team specializes in all aspects of financial health, including retirement planning, risk management, investment advice, tax strategies, estate planning and insurance.

‍Bayntree does not provide specific legal or tax advice. Please consult with your tax advisor or legal professional for guidance with your individual situation.

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