Top Reasons to Open / Set up a Solo 401k Plan

Saving in a self-employed solo 401k plan comes with tax benefits that can help the business owner grow his or her money.

Key takeaways

  • The sooner you start the more time your money has to grow. 
  • Get the tax deduction benefits. 
  • Gain the option to self-direct your retirement funds into alternative and traditional investments. 

Even if you only perform self-employment activity on a part-time basis, opening a solo 401k can be an option for maximizing retirement savings. Along with the tax benefits and the option to invest in alternative investments like real estate, notes, metals, private shares as well as equities (e.g., stocks and mutual funds), a solo 401k can help grow your next egg. 

Here are some reasons to open / set up a solo 401k plan now

1.Start putting your money to work

Eligible business owner’s with no full-time, W-2 employees can contribute up to $57,000 per year for 2020, or $63,500 if they have reached age 50. This is a hefty contribution–imagine how much it can balloon over time. 

The younger you start investing in a retirement account such as a solo 401k plan matters. Compounding is on your side earlier you start. Compounding is what happens when an investment earns a return, and then the gains on the initial investment are reinvested and begin to earn returns of their own.

2. Reduce your taxes

As the owner-only employee, you can choose to make tax deductible or non-deductible Roth or voluntary after-tax contributions. The pretax solo 401k contributions are tax deductible for the year the contribution is made. The destructibility of your pretax contribution based on your net self-employment income. The earnings on the investments grow tax-deferred, or tax free if held inside the Roth solo 401k.  For pretax funds, taxes are then paid when withdrawals are taken from the account—usually once you reach retirement age of 59 1/2.  Taxes don’t apply to qualified Roth solo 401k contributions, however. 

3. Self-direct your investments

With a solo 401k plan, you (the business owner) serves as trustee of the plan, so you have the freedom to self-direct the account. The solo 401k rules allows for  a wide variety of investment options, and  having more options gives you more control. Through a solo 401k plan, the self-employed business owner can diversify her nest egg in both equities and alternative investments

Open a solo 401k plan and  start investing

If you are self-employed or own a business such as an S-corp, C-corp, LLC or partnership with no full-time, W-2 employees you can open a self-employed solo 401k. If your spouse also works in the business, he can participate as well.

For 2020 and future years, the deadline to set up a solo 401k plan is your business tax return filing deadline, including extensions. 

About Mark Nolan

Each day I speak with energetic entrepreneurs looking to take the plunge into a new venture and small business owners eager to take control of their retirement savings. I am passionate about helping others find their financial independence. Having worked for over 20 years with some of the top retirement account custodian and insurance companies I have a deep and extensive knowledge of the complexities of self-directed 401ks and IRAs as well as retirement plan regulations. Learn more about Mark Nolan and My Solo 401k Financial >>

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