If you are a freelancer, an independent contractor, an entrepreneur, or any other type of self-employed individual, you may be wondering what the best type of retirement plan is for you. After all, it’s just you involved in the business; you don’t have access to the huge funds and resources that enable large companies to provide enticing 401k plan options.
Luckily, there is a solution designed specifically for the visionary who operates as the sole employee and the employer in his or her small business: The Solo 401k.
Why Should I Open a Solo 401k?
There are three main reasons why a self-employed individual may elect to open a Solo 401k:
- Tax Deductions. The contribution limits available with a Solo 401k are impressive, to say the least. Because you operate as both the employer and as the employee, you can essentially contribute as both of those designations. As an employer, you have the ability to save up to $37,500 each year. As an employee, you can save up to $19,500 per year (with an extra $6,500 if you are over 50 years old).
- Tax Options. Solo 401k plans offer both “Traditional” and “Roth” options. With the “Traditional” option, you will make pre-tax contributions to your plan, while with the “Roth” version you will make after-tax contributions. Depending on the needs of your business and your predictions on how taxes may change over the years, you can decide which option is best for your business.
- Retirement funds should not be touched unless absolutely necessary. However, when you are the only member of your company, you have few places to turn when difficult times come about. Therefore, with a Solo 401k, you have the option to take out up to $50,000 in loans if needed.
What Should I Consider when Selecting a Solo 401k Plan?
You’ll want to weigh a number of factors when selecting your Solo 401k plan including:
- The Cost of the Plan. You’ll certainly want to find a plan that has few or no extra costs associated with it. Even if the “Assets Under Management” fees are small, they can add up over time and cut into your benefits.
- Plan Set-up and Management. How much time do you realistically want to spend tinkering with and setting up your 401k plan? You’ll ideally find a plan provider that makes this process smooth and easy, allowing you to focus your energy on your business instead of your retirement plan.
- Support if Issues Arise. Hopefully no issues ever arise, but it’s a fact of life: mistakes do happen. Sometimes things go wrong. When they do, you’ll want to have a friendly, supportive team that can quickly and efficiently address your issue and get you back on track.
- If you find a rigid plan that fits your needs and you have no expectation that anything in your business will ever change, then you may not care about customizing your plan. However, for those that anticipate needing to be flexible in their 401k plan, it’s important to look for plans that offer options.