The Solo 401k – A Powerful Retirement Savings Vehicle

BY CINDY YOUNGCOURT, CFP®, CPWA®

A lot of us have retirement plans available to us at our jobs-401ks, 403bs, 457s.  What about the self-employed?  They sell on Etsy, are therapists, graphic designers, marketing gurus, hairdressers, landscapers, realtors, tutors, consultants-just to name a few.  I have found that many of them do not have a retirement plan.  Many do not know how much they can put away or the best way to accomplish their retirement savings goals.   There is good news!  There are retirement plans that you can set up and it is not too late to put money away into retirement plan for the 2022 tax year.

Here are 2 savings vehicles that can be used by the self-employed or the 1099 income earners:

The Solo 401k

  • Contribution Limits

  • Employee Contribution – $22,500 plus $7500 catch-up if over age 50

  • Employer Contribution – 20 to 25% of net profit depending on how business is setup.

  • Total Maximum-$66,000 and $73,500 if over age 50

  • Employees – the only employee allowed is your spouse., unlike traditional 401k plans for companies.

  • Allows for Roth contributions.

  • Loan provision – can borrow up to 50% of account value or $50,000 – whichever is less.

 

 

The SEP IRA

  • Contribution Limits – the lesser of $66,000 or 20% of self-employed net earnings, 25% of earnings if you have employees.

  • No Employee contributions

  • Employees – you can have employees in your business and contribute to a SEP IRA, but you must contribute the same percentage to your employees as you do for yourself

  • Allows for Roth Contributions

  • No Loan provisions

If your only employee is you (and possibly your spouse), I recommend a Solo 401k.  Why?

  • You can put more money away

  • You can borrow money if needed

Here is an example of how much someone who is self-employed and makes a net profit of $70,000 a year and is under 50 can save per year in a Sep IRA and in a solo 401k:

 

 

SEP IRA  Employer contribution $13,010

 

Solo 401k Employer contribution $13,010 PLUS Employee contribution $22,500-$35,510

 

If you have net income for the year 2022, it is not too late to setup a Solo 401k because of recent legislation and make employer contributions for the year 2022.    Also, many of our clients both work for an employer and have a side job.  They are able to put money into BOTH the employer 401k plan and the Solo 401K. 

 

Want to discuss your options and what is best for you?  Please reach out to me at 302-254-6124

 


Learn more about your retirement options. Schedule an appointment with one of our financial advisors.

Kyra Smith