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.
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:
Important note: this type of account does not help to avoid paying self-employment tax.
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.
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.
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 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:
For those over 50, the combined employee and employer annual contribution maximum is $64,500 for 2021.
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.
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.
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 firstname.lastname@example.org.
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.