The Solo 401k – A Powerful Retirement Savings Vehicle

BY CINDY YOUNGCOURT

I know a lot of self-employed men and women – some are clients, some are those that I rely on when I need or want a product or service – the realtor that sold us our home in 2017, the independent contractor we just hired to build a fence for our 3 dogs,  my personal trainer who works full-time during the day, but is self-employed on nights and weekends. The (mostly) women who are self-employed and work for multi-level marketing companies – leggings, dresses, jewelry, candles, makeup, skin care, essential oils – almost anything I can think of, I can get locally from an independent business woman. 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. 

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

The Solo 401k

  • Contribution Limits

o   Employee Contribution – $19,500 plus $6500 catch-up if over age 50

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

o   Total Maximum-$57,000

  • Employees – the only employee allowed is your spouse.

  • Allows for after-tax contributions, which can be converted to a Roth IRA.

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

The SEP IRA

  • Contribution Limits – the lesser of $57k 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

  • No Roth Option

  • 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 make after tax contributions and convert to a Roth IRA

  • You can borrow money if needed

Here is an example of how much someone who is self-employed and makes a net profit of $80,000 a year and is under 50 can save per year:

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Here is how much someone that makes a net profit of $40,000 a year and is under 50 can save per year:

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

Kyra Smith