Benefits of a Solo 401k Plan for Your Business

Self-employment offers freelancers, entrepreneurs and independent contractors alike complete freedom. You can work whatever hours you like, you don’t have a boss breathing down your neck, and you get to enjoy all the benefits of your labors.

This is not to say that self-employment is completely free from drawbacks. Clearly there are some aspects of a solo venture that are much more difficult than working for an employer. However, one of the biggest benefits of being self-employed where retirement is concerned, is the ability to open a Solo 401k.

What Makes a Solo 401k so Appealing?

A solo 401k is a plan available only to self-employed individuals. It is a phenomenal retirement plan with numerous benefits:

  1. Massive Tax Deductions. When compared side by side to other retirement plans available to self-employed individuals, the Solo 401k is king in terms of tax deductions. The plan enables you to have the maximum limits to your contributions.
  2. Defer Taxes or Pay Now. You have the option of a “Roth” Solo 401k which enables you to pay taxes early, but enjoy tax-free withdrawals at the time of retirement. Compare this to the “Traditional” Solo 401k, which gives you the option of paying your taxes at withdrawal time.
  3. Ability to Withdrawal Money, If Needed. Obviously, you want to let your retirement fund grow until you are ready to retire. But emergencies do happen. As a self-employed individual, you may not have many other options besides cashing in your 401k. Should you need to do so, you are able to borrow $50,000 dollars or 50% of the value of the plan; whichever amount is less.
  4. Contribute as an Employer and Employee. As strange as it may sound, as a self-employed individual, you are your own boss and your own employee. As an employer, you have the ability to contribute up to $37,500 per year. Additionally, as an employee, you can contribute up to $19,500 per year (with an additional $6,500 if you are over the age of 50).

What Considerations Should be Made When Choosing a Solo 401k Plan?

As good as a Solo 401k may sound, there are some considerations that should not be taken lightly as you move forward in choosing your Solo 401k plan:

  1. How Much are You Willing to Pay for Your Plan? When speaking with your 401k provider, ensure that you know exactly how much you will be responsible for in fees and other costs throughout the life of the plan.
  2. Is it Difficult to Manage the Plan? Determine how much of your time and effort will go into setting up and tweaking your plan as time goes by.
  3. Can I Get Help If I Have Questions? Find out if your provider has good customer service available when you are selecting and modifying your plan.
  4. Can I Change My Plan? As the needs of your business change, so will your requirements for your retirement plan. Make sure that there is flexibility within your plan.

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