Solo 401Ks Offer Tax-Advantaged Retirement Planning for the Self-Employed

A solo 401K plan is one of the most popular retirement plans for self-employed individuals running a business without other employees. A solo 401K offers participants the option of contributing their pre-tax income to the plan to help fund your retirement and lower your federal income tax.

There are no income or age restrictions for starting solo 401K, but the business cannot have any employees. However, a spouse who earns income from the business can make contributions to a joint plan.

Calculating your solo 401K contribution can be complex because you contribute as both an employer and an employee. The pre-tax employee contribution is capped at $19,500 or 100% of your compensation, plus a $6,500 catch-up contribution if you are over 50. As the employer, you can make a profit-sharing contribution of up to 25% of your compensation, up to $57,000 for 2020. Your total contribution to a solo 401K is capped at $57,000 for 2020, $63,500 if you make a catch-up contribution.

Participants in a traditional solo 401K make pre-tax contributions that reduce taxable income for the year made. Roth 401K contributions are made after tax and will not reduce the amount of income subject to tax. Distributions from a traditional 401K are taxed as income, while Roth 401K distributions are tax-free.

If you are self-employed and have any questions about enrolling yourself or your spouse in a solo 401K, the tax professionals at Code Accounting are ready to help. We can show you which plan will work best for you to both maximize your tax savings and ensure that you are saving enough for retirement.

Categorised in: HR and Payroll

This post was written by Sean Allaband