Entrepreneurs are self-employed, which means they need to fulfill the tax obligations of both an employee and an employer. Solo 401(k) retirement plans are specifically designed to allow qualified businesses and entrepreneurs to enjoy financial flexibility and tax benefits while saving for retirement.
How Can You Apply for a Solo 401(k) Plan?
Individuals can contribute as employers and employees from their pre-tax income through the Solo 401(k) plan. As an employer, an individual is allowed to make deposits amounting to 25% of their salary before tax in profit-sharing contributions. As an employee, an individual can save 100% of their compensation or up to $19,500, based on the lower amount. In addition, if you are over 50 years, you can make an additional contribution of $6,500 to the retirement plan.
Here are the steps that one can follow to apply for a Solo 401(k) plan:
- The first step is to select a professional retirement plan provider who can help set up the plan.
- Next, you are required to submit the application form and adoption agreement. Once this has been completed, you will receive your account details and Employer Identification Number, also known as EIN. During this time, you have the option to select between Roth or traditional plans.
- You can now start contributing to your retirement and invest in mutual funds, bonds, index funds, stocks, exchange-traded funds, or certificates of deposit based as per your choice.
- Whenever you start a retirement plan, make sure you meet the IRS deadlines for plan contribution. You should make all employee contributions to the plan by December 31st each year. While all employer contributions need to be made before April 15th of the following year.
What are the Benefits of Choosing Solo 401(k)?
A Solo 401(k) plan is best suited for entrepreneurs, freelancers, independent contractors, sole proprietors, or side-job workers. Here is a list of benefits you can enjoy once you set up the plan:
- Comparatively higher contribution limits than any other retirement options with the benefit to enjoy high tax savings through maximized contributions.
- Options to defer tax in order to reduce your tax burden.
- Ability to borrow a loan from the retirement funds if you are urgently in need of money.
- Freedom from asset management charges.
Factors to Consider When Choosing Solo 401(k) Plan
According to Ubiquity, always make sure to consider the following factors when selecting a Solo 401(k) plan:
Plan Costs: All Solo 401(k) retirement plans are free of Asset Under Management (AUM) fees or trading costs. It is recommended to select a provider who offers complete transparency and has low administrative costs.
Easy Set-Up and Management: Your plan should be easy to set up and include a user-friendly dashboard for plan management activities. Always select a provider who offers useful online tools such as monthly analysis and savings reports for quick plan management.
Quality Support Service: It is suggested to choose a provider with good customer service so that you have assistance if you face any plan-related problems.
Flexibility: Lastly, select a plan that provides flexibility with contributions, including borrowing or funding options, and has a wide range of investment options.