Entrepreneurs who are looking for freedom through self-employment often fail to assume the risks of the work and tax obligations that need to be fulfilled as you are both the employer and the employee. According to 401(k) plan provider Ubiquity, a Solo 401(k) allows qualifying entrepreneurs and solo business owners to create a retirement plan and enjoy tax benefits, save for their future and enjoy financial flexibility.
What is a Solo 401(k) And How Can You Apply for It?
A Solo 401(k) functions in a way that you are contributing both as an employer, and an employee. These contributions are made on a pre-tax basis. As an employer, you can save up to 25% of your net income in profit-sharing contributions. While, as an employee, you can save either 100% of your compensation or up to $19,500 depending on whichever is the lesser amount. Individuals over the age of 50 years can add $6,500 as catch-up contributions.
If you are interested in opening a Solo 401(k) you need to follow the steps mentioned below:
- First, you need to select a Solo 401(k) provider who will support you in setting up the plan.
- Next, you need to fill out the application forms and plan the adoption agreement after which you will receive a new account and an Employer Identification Number. You have the option to select from a traditional or a Roth plan.
- You further need to set up contributions and begin investing in stocks, bonds, index funds, mutual funds, exchange-traded funds, or certificates of deposit as per your choice.
- Ensure that you meet the deadlines set up for Solo 401(k) plans. Employee contributions are required by December 31st each year while the employer contributions can be made until the tax-filing deadline of April 15th.
- When your plan tops $250,000, you need to submit the 5500-EZ paper form or the 5500-SF electronic form each year.
- Solo 401(k) allows you to select additional services for direct financial management through the service provider to fulfill any unique retirement goals.
Factors to Consider While Selecting A Solo 401(K) Plan
A Solo 401(k) is ideal for a solo entrepreneur, sole proprietor, independent contractor, freelancer, or side-job worker as a Solo 401(k) plan supports high contributions limits, loan flexibility, and tax deference. It is recommended to consider the following factor before selecting a Solo 401(k) plan.
Plan Costs: Solo 401(k) plans usually do not have any asset management costs or trading fees associated with it. It is recommended to select a provider who has a transparent and low fee model.
Ease in Setting Up and Managing the Plan: Your Solo 401(k) plan should have a user-friendly dashboard that supports quick set-up and long-term plan management. It is suggested to choose a provider that provides online tools to run reports, select and manage investments, receive online statements, and more.
Quality Support Service: It is also recommended to select a plan that is backed by a strong customer support team who can help you with any plan related queries, or issues that you may face.
Flexibility: Lastly, you should select a plan that has flexibility in terms of making Roth contributions, borrowing money, investment choices, fund options, and long-term sustainable investment options.