I’ll admit, before recently researching it, I didn’t know nor would’ve guessed the percentage of workers in the country who are self-employed. As of March of this year, self-employed workers in the United States made up 10.3% of the total workforce, according to the Bureau of Labor Statistics. That amounts to nearly 17 million entrepreneurs. Perhaps the only thing these 17 million individuals know more about than hard work is self-employment taxes–but that’s another topic for another day.
What many of these 17 million may know much less about, however, is the retirement savings account for self-employed individuals. Sure, they’ve heard about 401(k)s for the other 89.7% of workers. Maybe they even have some money sitting in a 401(k) of their own from a previous employer before becoming their own boss. If that’s the case, or even if you’re an employed individual reading this who has a 401(k) from a previous employer, click below to check out our Guide to Avoiding 401(k) Rollover Mistakes.
For you 10.3%, though, what are the best ways you entrepreneurs can save for retirement? One of the most popular and powerful tools for doing so that we’ll discuss here is the Solo 401(k). It’s a retirement savings vehicle far less known about than its more popular sibling, the traditional 401(k), yet there are still 17 million people in this country who the topic is relevant to. Knowing this, we asked our founder, Brandon, to answer some of the common questions that we’ve heard about Solo 401(k)s.
Who is eligible for a Solo 401(k)?
Brandon: Business owners with no employees (other than a spouse) qualify for opening up and contributing to a Solo 401(k).
What makes a Solo 401(k) stand out compared to an IRA (individual retirement account)?
Brandon: The biggest advantage is the contribution limit. For 2024, the contribution limit for Solo 401(k)s is up to $66,000, or $73,500 if you’re 50 or older (making use of the catch-up contribution provision). That’s significantly higher than the $7,000 IRA contribution limit allowable ($8,000 for 50+). Plus, you can contribute both as the employer and the employee, which really boosts your savings potential! Another special feature is the ability to take a Solo 401(k) loan–which I’ll get into in a moment.
I have a 401(k) from a previous employer–can I roll that into my Solo 401(k)?
Yes! If you have a 401(k) from a previous employer or if you go back into the employed workforce from working for yourself, you can roll over your Solo 401(k), respectively. Done right, these rollovers occur relatively simply and without tax consequences. If such a rollover is on the horizon for someone, I’d recommend they’d check out our 401(k) rollover guide first to be sure that, again, it’s done right.
What are the tax benefits and investment options that come with a Solo 401(k)?
Like a traditional 401(k), your contributions reduce your taxable income, which can lower your tax bill. And many plans offer a Roth option, allowing after-tax contributions that grow tax-free. Unlike a traditional 401(k), which may have a limited investment portfolio to choose from depending on where your employer decided to set up their plan, you have complete control over your Solo 401(k), which typically comes with a wide range of investment options.
You mentioned Solo 401(k) loans–can you tell us what those are and how they work?
Absolutely. This is one great feature of the Solo 401(k) that is perhaps less well known–the ability to take a loan from the money in your Solo 401(k). You can borrow up to $50,000 or 50% of your account value, whichever is less. You have five years to pay back this loan with one exception–if you’re a first-time homebuyer using the funds to purchase a new primary residence. In that case, the payback term increases to 15 years.
One of the benefits of a Solo 401(k) loan is that the funds aren’t treated as a normal, taxable withdrawal, but are tax-exempt (given that you pay the loan back in time). Another benefit is that when you make payments on your Solo 401(k) loan, you’re simply paying yourself back. This includes the interest on the loan as well!
This can be incredibly helpful if you need funds for your business. This isn’t an option that you get with IRAs.
Any final thoughts for fellow entrepreneurs?
If you’re serious about maximizing your retirement savings and want the flexibility and higher contribution limits, a Solo 401(k) is definitely worth your consideration. It’s a powerful tool that can help secure your financial future while you focus on growing your business.
Are you an entrepreneur? If so, we hope this few-minute sit down session answered some questions that you may have had for a while but hadn’t yet had the time to answer.
Also, we know that your job involves much more than whatever industry you’re in calls for. Being your own boss may come with many benefits, but we know that it comes with just as many responsibilities that also take a huge portion of your time–quarterly tax reporting, spearheading initiatives to grow your business, record-keeping, constantly shuffling between worker and manager, to just name a few.
At our firm, we haven’t just heard third-hand of these many different hats you wear–most of our team have been self-employed at some point in their lives themselves. We know first-hand how much focus and how much time the composite of all these responsibilities can take up.
Add on to this reading up on how to save for retirement as a self-employed individual and keeping up on the ever-evolving tax laws as they relate to you? Now that’s adding onto an already full plate.
This is what what our expertise is for. We know you work hard for the money you’re saving, we’d love to make it work hard for you. If you’d like us to easily help you set up a Solo 401(k), help with a 401(k) rollover, and/or a personally-tailored retirement plan, click the button below to schedule a 15-minute strategy session with Brandon.
