Maximizing Retirement Savings with a Solo 401(k)

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How a Solo 401(k) Works

A solo 401(k) is a retirement savings plan designed for business owners without employees. If you are self-employed or a career freelancer, this plan can be a powerful tool for long-term savings. Similar to a traditional 401(k), it offers attractive tax benefits and helps grow your nest egg over time. Understanding how a solo 401(k) works can help you decide if it is the right choice for you.

Eligibility

Solo 401(k) plans are available to those who are self-employed or own a business with no employees, except for a spouse. The business must have an employer identification number (EIN).

2023 Contribution Limits

As an employee, you can contribute up to $22,500. If you are 50 or older, you can contribute an additional $7,500. As an employer, you can contribute up to 25% of your earned income. Total contributions cannot exceed $66,000 in 2023, excluding catch-up contributions for those 50 or older.

Tax Advantages of a Solo 401(k)

Employee contributions are tax-deductible, reducing your taxable income. Employer contributions are considered a deductible business expense. Your money grows on a tax-deferred basis, meaning you won’t owe taxes until you begin taking distributions. You can also consider a solo Roth 401(k), which is funded with after-tax dollars and allows for tax-free withdrawals in retirement.

Is a Solo 401(k) a Good Idea?

If you are self-employed and looking for a tax-friendly way to save for retirement, a solo 401(k) is worth considering. It allows for higher contributions compared to a traditional 401(k) and offers significant tax benefits. However, if you have employees who are not contract workers, you may need to explore other retirement savings options.

How to Open a Solo 401(k)

To open a solo 401(k), compare providers to find the right fit. Decide whether you prefer the tax benefits of a traditional solo 401(k) or a Roth. Open your account and select your investments, which may include mutual funds and ETFs. Ensure you comply with IRS rules, including annual contribution limits and filing requirements if your plan exceeds $250,000 in assets.

The Bottom Line

A solo 401(k) can help self-employed individuals maximize their retirement savings with generous contribution limits and tax advantages. It is especially beneficial if your spouse also earns income from the business.

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