Self-Employed? Need to Build Your Retirement? No Traditional Employees? Perhaps a Solo 401K plan is for you! If you are not self employed maybe starting a business should be one of your New Year’s resolutions, so bring in the New Year by starting your own business.
The benefits of a 401K for self-employed business owners can be great. It provides many tax advantages that traditional plans do not. First and foremost the contribution limits for a one-participant 401(k) plan can be substantially more than annual contributions to an IRA. This is a plus for those us that are self employed business owners as it helps self-employed people to build their retirement through both ROTH and regular contributions. The 401k contributions are made by both the employee and the employer. In this case the business owner wears two hats in a 401(k) plan: as employee and as employer. The IRS allows contributions to be made to the plan in both capacities. The owner can contribute both:
- Elective deferrals (the Employee Contributions) up to 100% of compensation (“earned income” in the case of a self-employed individual) up to the IRA annual contribution limit:
- $19,000 in 2019, or $25,000 in 2019 if age 50 or over ($18,500 in 2018, or $24,500 in 2018 if age 50 or over); plus
- Employer non-elective contributions (the Employer Contributions) up to:
- 25% of compensation as defined by the plan, or it may be limited depending upon certain circumstances (the IRS imposes limits especially if contributing to more than one plan-contact your attorney or CPA to determine the proper contributions).
See our second part of this to find out the additional benefits of a solo 401K. Other plans for small businesses are SEP IRA and SIMPLE IRA’s and for those with traditional employees 401K plans, however there are restrictions and limitations imposed. If you have questions contact us or contact your tax and legal advisor.