Self employed retirement with a solo 401k

Saving Solo: Keep reading to find out how you can reduce your small business taxes with a 401(k) Retirement Plan for the Self-Employed. Often called a Solo 401(K) or Individual 401(K) this tax-saving retirement plan can help you slash your tax bill this year and into the future. Not to mention stay on track for your retirement goals. California business owners in the highest income tax brackets could save several hundred thousand dollars in taxes over the next decade when maxing out a solo 401(k).

What solopreneurs, freelancers, and small business owners need to know and need to do to fund their retirements utilizing a solo 401(K) Plan. You won’t get a current tax deduction, but a Roth Solo 401(k) can help lower your taxes in retirement.

By David Rae Certified Financial Planner™, Accredited Investment Fiduciary™

Update: Contributions limits have increased for 2022 to a total of $61,000. Plus an additional $6500 catch-up contribution if you are 50 or older. The TCJA Tax Plan makes these plans even more valuable for many small business owners. Defined Benefit Contribution Limits have also increased for 2022. Talk to your Fabulous Financial Planner and CPA about the 20% pass-through tax break.

Update: New 2023 401(k) contribution limits have been announced. You will now be able to contribute a total of $66,000 in 2023 to your Solo 401(K) if you meet income requirements. There is still time to open a Solo 401(k) for 2023.

New 2024 Solo 401(k) Contribution Limits

The new 2024 contribution limits have been announced. Business owners will be able to contribute up to $69,000 to a Solo 401(k) in 2024. The Catch Up Contribution is still $7500 in 2024. So you know the employee 401(k) contribution limit in 2024 is $23,000.

The fastest way to clear a crowded room is not to run in and yell, “Fire!” but to walk in and start talking about taxes and retirement planning. But hear me out. If you are a solopreneur, freelancer, or small business owner, you’re going to want to stick around for this. The responsibility for picking out – and sticking to – a retirement plan falls squarely on your shoulders, as you probably know. But here’s some good news; setting up a retirement plan for yourself doesn’t have to be complicated or expensive. (We help make the process for our clients here at DRM Wealth Management. Helping you find the retirement plan that keeps you on track for a secure retirement while paying the fewest taxes on your business income).

If nothing else these retirement plans can help you minimize your current tax bill. Do you really want to write a check to the IRS?

Many millions of self-employed Americans think they are too small to set up their own 401(k) plans. They also fear large bills to set up and manage the plans. While setting up a solo 401(K) plan is more involved than a basic IRA or investment account, the benefits can far exceed the trouble and cost.

To minimize your current income tax bill, retirement contributions may be a good way to go. If you are able to save more than the $6500 per year allowed for a traditional or ROTH IRA, you may want to discuss a Solo 401(k) retirement plan with your trusted fiduciary financial planner.

Here are the three biggest ways you can benefit from a Solo 401(k) for your owner-only business.

1. Tax-deferred investment up to $69,000 per year (plus $7500 more if you are 50+)
  
  For many business owners who’ve spent years building their businesses, there hasn’t been much time planning for retirement. This option can be a good opportunity to play catch up. Since you are the owner and employee you can have some flexibility to pay yourself a profit-sharing contribution. This is on top of contributing as an individual.
  
  The biggest advantage of a Solo 401(k) profit-sharing plan compared to other retirement accounts is the ability to make higher contributions. A business owner can potentially contribute up to $69,000 per year to the plan for themselves in 2024. And if you are older than 50, that figure jumps to $76,500 per annum. Contributions this large could drastically cut your current tax liability on current income. Would you rather write a large check to the IRS or contribute to your own retirement account? I would love to save people who are saving for retirement to ensure their financial security. In reality, I know many are motivated by the huge tax savings.
2. Individual 401(k) Plans For Multiple Owners And Spouses

These plans could be a good fit for businesses with more than one owner. The benefits of tax deferral can potentially apply to multiple owners as well as spouses who receive income from the business. Discuss with your tax pro and fiduciary financial planner how partnerships and collective owners can leverage these vehicles in their favor.

Be aware that once a business hires employees who do not hold ownership of at least 5% of the company, they will be required to use the more traditional 401(k) plans. This can potentially increase the cost of the plan. Requiring employee matches or allocation of a portion of profit-sharing contributions to non-owners. The plans can still be structured to heavily favor the owner. The vesting schedule also requires employees to work for you for several years before they are allowed to keep the full amount of money you put in for them.

3. Solo 401(k) Plans That Minimize The Annoyance Of Some Complex Regulations

401(k) plans are often considered onerous and complex because of all the government regulations that cover things like non-discrimination and other tests that confirm a plan benefits all employees. Since a solo 401(k) just covers owners and their spouses there is no conflict of interest and no added testing. A little more paperwork than opening a traditional IRA. But way more potential tax savings.

If you think a solo 401(k) profit-sharing plan might benefit you and your retirement plan, contact your trusted fiduciary Certified Financial Planner™. You must set up your plan by December 31^st, but you have until you file your taxes to make your contributions.

Extra credit- Defined Benefit Plan Solo 401(K) combo

If you are already maxing out your 401(k) contributions, you might want to consider adding a Defined Benefits Pension plan for potentially even more tax deferral. I just set up a Defined Benefit Pension plan for a new client. He was able to contribute an additional $200,000 (plus) on top of his solo 401k plan.