Starting a business is always an exciting prospect: you don’t have any managers breathing down your neck, you can set your own hours, take vacations whenever you want; the list of benefits goes on and on. However, there are also some drawbacks to starting a business, one of them being tax implications. When you are your own boss, you have to pay taxes as both an employer and an employee respectively.
Luckily, there is a solution to the issue of taxes when it comes to sole proprietors, freelancers, and others who are self-employed: a Solo 401k retirement plan. This plan effectively solves many of the issues that self-employed individuals face when it comes to retirement planning and tax issues. In this article, we’ll outline some of the specifics of a Solo 401k retirement plan to determine if this option will work for your business.
What is a Solo 401k?
A Solo 401k is a retirement plan that allows the self-employed to enjoy unique benefits that do not apply to large companies. The plan allows the individual to pay into a retirement fund as both an employee and an employer. The specific benefits are as follows:
- Tax Deduction Implications. As compared to other self-employment retirement plans, the solo 401k allows for the greatest contribution limits. In fact, as an employee, you can contribute $19,500 per year. Additionally, as an employer, you can contribute up to $37,500 dollars per year. This adds up to over $57,000 per year for the self-employed worker. For those over the age of 50, there is an extra $6,500 in contributions available.
- Roth or Traditional Option. You have the ability to opt for the “Roth Solo 401k”, which enables you to contribute to your retirement fund after tax and enjoy tax-free withdrawals when you are ready to do so. Alternatively, you may elect to open a “Traditional Solo 401k”, which is designed so that your withdrawals are taxed as you make them. The choice is yours in a Solo 401k, and you can make whichever decision makes the most sense for your business.
- More Loan Options. It should go without saying, but the money in your retirement fund should be left alone and allowed to mature over the years. However, when you are the only employee in your company, as well as the only employer; you may encounter difficult financial situations and have nowhere to turn but your retirement fund. Because of this, Solo 401k plans allow individuals to take out loans up to 50% (or $50,000) of the value of their retirement fund, if needed.
Should I Consider a Solo 401k For My Business?
Ultimately, it is up to you to decide the best course of action for your business. When you operate in two roles: as boss and employee, you may find great value in opening a Solo 401k. The tax options, loan flexibility, and overall benefits to a sole proprietor are numerous and should be strongly considered by anyone who qualifies for a Solo 401k plan.