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Blog: Solo 401(k)

Have you heard the term “Solo 401(k)” and wondered what it is? The name basically describes the plan. It is a 401(k) plan with only one participant. This plan is for those who own their own business and do not have any employees, so the business owner is both employee and employer in the business. A solo 401(k) is the same as a regular 401(k), the total contribution limits and rules do not change; however, there are some things to know if you are contemplating setting up this plan. We will go through the main questions people ask when considering setting up a solo 401(k) for their business.

What is a Solo 401(k)?

As described above, it is a plan for business owners who have no employees. Spouses of the business owners can also be included in the plan. A 401(k) is a way to save for retirement. As a business owner, it is up to you to save for your own retirement. This plan is a way to save a large amount of money both from the business as the employer and out of your own paycheck as the employee.

What are the tax benefits of a solo 401(k)?

Well first, there are tax benefits for the business. The money the business adds to the solo 401(k) is tax-deductible to the business. Then, as the employee, you are often able to choose your tax treatment for your contributions as well.

If you want to take the tax deduction now, you can contribute to a traditional solo 401(k). If you want to let your money grow tax-free, you can contribute to a Roth solo 401(k). You pay the taxes now, but when you withdraw from a Roth solo 401(k) during retirement, you don’t pay a single dime in taxes.

Taking advantage of the Roth solo 401(k) would allow you to have the best of both worlds as a business owner. You get the tax deduction now for your business, adding pre-tax money into your solo 401(k). This money will grow tax-deferred and you will pay taxes on the withdrawal in retirement. Then, you also have the ability to have your own contributions be Roth. You pay income taxes on your individual income now, and then add the money to the Roth portion of the 401(k). This will grow tax-free and you will not pay any taxes on the withdrawals you take out during retirement. Having both types of money in your retirement portfolio will allow you to do strategic income tax planning throughout retirement.

How can I cover my spouse in the solo 401(k) plan?

If your spouse works for the business as an employee, meaning you are paying them and they are reporting those wages, they can also participate in the solo 401(k) plan. This would not change the rules of the solo 401(k) plan as it would if you hired an employee who was not your spouse. So, how much money can your spouse add? The limits are the same for your spouse as they are for you. Your spouse can add $19,500 annually out of their paycheck, and the business can add up to 25% of compensation.

To find out more visit our Solo 401(k) blog.

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Alvin Carlos, CFA, CFP®

About Alvin Carlos, CFA, CFP®

Alvin Carlos, CFA, CFP® is passionate about helping middle class professionals make smarter financial decisions. He is the CEO of District Capital Management, a financial planning and investment management firm for the everyday people. Alvin is a CERTIFIED FINANCIAL PLANNER™ practitioner and has a Masters degree in International Relations from SAIS-Johns Hopkins. In his spare time, Alvin enjoys swing dancing and Ultimate Frisbee. He also volunteers for Catholic Charities’ new Financial Stability Network, which helps low-income folks with their finances.


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