As a small business owner, how confident are you about your ability to live comfortably in retirement? According to a recent survey conducted by the Employee Benefit Research Institute, 76% of workers that have a 401(k) or other defined contribution (DC) plan are “confident” or “somewhat confident” about retiring comfortably. But for workers without the benefit of a 401(k) or similar plan, confidence about retirement security drops significantly to just 46%.
A 401(k) plan for self-employed persons
401(k) plans are not just a perk for employees of large corporations. The Solo 401(k), or “One-Participant K” is a traditional 401(k) plan for a business owner with no employees, or that individual and his/her spouse. The business can be a sole proprietorship, partnership, or an S or C corporation. And while the Solo 401(k) has the same rules and restrictions as other plans, there are a few features that can help you grow your retirement nest egg faster than other retirement options.
For 2018, you are permitted to make elective contributions up to 100% of your earned income, up to a maximum employee contribution of $18,500. If you are 50 or over and eligible for catch-up contributions, that limit increases to $24,500. But with the Solo 401(k), you can also make non-elective contributions to the plan as the employer as well, up to 20% for self-employed persons, and 25% of compensation for corporations. Total contributions from both sources for an individual can be as much as $55,000 for 2018 ($61,000 if 50 or over). IRS rules also allow loans from these plans (up to 50% of the value) at a low-interest rate.
How can I set up a Solo 401(k) for my business?
A Solo 401(k) need not be complicated or expensive; it can be managed by a financial custodian or self-administered by the business itself. A financial professional or CPA will need to draft plan documents to ensure they conform to IRS requirements, but decisions about where to invest can be made by the business owner herself. The plan, however, must be in place before December 31 to be effective for this tax year.
Have further questions about the Solo 401(k)? Let us answer them and put you on the road to a comfortable retirement.
Tax Tips for the Self-Employed – Foster Financial
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Strategies for Optimizing Your Investments