A 401k solo plan is a potential alternative for the self employed to a 401k plan. There are many advantages to such a plan and should be strongly considered by anyone planning to work for themselves.
To apply for a 401k solo plan you need to be self employed. You can either be a sole proprietorship or incorporated business, as long as you don’t have any employees. However there are exceptions, for example you can still apply if your spouse is part of the business, hire w-2 workers who do less than 100 hours a year or you hire outside contractors.
The maximum you can pay into your plan is $49,000 a year or $54,000 if you’re over 50. Your total contributions are broken down into two parts, salary deferrals and profit sharing. The maximum you can add from salary deferrals is $16,500 and $22,000 for the over 50. Profit sharing contributions tend to vary based on whether you’re a sole proprietorship or incorporated business.
You have to be over 59 and 6 months before you can begin withdrawals funds from your 401k solo plan. To take out money before meeting the age requirements can lead to harsh penalties that are best avoided. The rule is sometimes waved in case of death or disability.
Solo 401 plans have a number of advantages such as being 100% tax deductible, potentially saving you some money on taxes. The solo 401 plans also give you the option to contribute money to the plan or not each month. This is helpful if you are low on funds one month. Of course if you need the cash in your plan you can always apply for a 401k loan.
401k loans are tax free and let you withdraw up to 50% of the savings from your plan or a maximum of $50,000. You still have to pay back the loan and you can have up to five years to do so.
Another possible option is the ROTH 401K plan which lets you have the salary deferrals portion as non tax deductible. In return your cash withdrawals after you retire become tax free. However, in order to get tax free withdrawals you need to be over 59 and 6 months and your plan needs to opened for longer than 5 years.
To calculate your 401k earnings there are numerous online calculators you can use. You simply put in your income and age and the calculator will do the rest.
The 401k solo plan is great for those who want a flexible 100% tax deductible pension. There are a number of other possibilities available however, so it’s best to consider all the potential options and find the one that best meets your financial needs.
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