Retirement Plans for Solo Entrepreneurs
A guide to maximize your retirement savings up to $73,500 for solo entrepreneurs
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What is a Solo 401(k) Plan?
A Solo 401(k) is a retirement plan solution for self-employed entrepreneurs.
The IRS refers to this type of plan as a one-participant 401(k) and it works very similarly to a standard 401(k) with profit-sharing.
This plan design is only permissible if the business has no employees (there is one exception we'll get to later).
If the business employs any other workers, they will need to look at other retirement plan options such as:
- SEP IRA
- 401(k)
How to Set Up a Solo 401(k) Plan
The only eligibility requirement for a Solo 401(k) is the participant must be a business owner without any employees (with one exception in the contribution section).
In order to open a Solo 401(k), the employer will need an Employer Identification Number (EIN). The owner will need to review the provisions they want to be included in the plan and incorporate them into the plan document.
A Form 5500 is not required for a Solo 401(k) if the plan assets are under $250,000. Once that threshold is reached the Form 5500 – Short Form will need to be completed annually.
How a Solo 401(k) Plan is Taxed
A Solo 401(k) plan could be taxed as a traditional 401(k), reducing taxable income in the year contributions are made. When this is distributed, the participant will pay taxes on the distribution as ordinary income.
The sponsor could also elect for Roth Solo 401(k) contributions, which do not offer an immediate tax deduction but allow for tax-free distributions in retirement.
What are the Solo 401(k) Contribution Limits?
In 2023, the total contribution limit for a Solo 401(k) is $66,000, with the allowance of a $7,500 catch-up contribution when the participant is over the age of 50. This is the total contribution limit for employee and employer contributions.
As the employee, $22,500 (or 100% of compensation, whichever is less) can be contributed to the plan. As the employer, additional profit-sharing contributions can be made. These contributions are up to 25% of compensation.
There is one exception to the no-employees rule, if the spouse of the entrepreneur earns income from the business, they can contribute up to $22,500 (plus the catch-up contribution if over 50). The employer may then make a contribution of up to 25% of compensation for a profit-sharing contribution.
3 Benefits of a Solo 401(k) Plan
1. Customizable Investment Options
A Solo 401(k) plan can have customizable investment options because the plan sponsor is the only participant. They can be any 401(k) acceptable investment.
In a normal 401(k), they may be limited to a fund lineup, but since there is only one participant the fund lineup may be customized to the owner’s preference.
2. Flexible 401(k) Loan Options
3. Minimal Administration Needs
Since a Solo 401(k) plan was created for freelancers, it has minimal paperwork compared to other 401(k) plans aside from the paperwork needed to begin the plan. This is to assist a smaller company with the burden associated with running a retirement plan.
What are the Cons of a Solo 401(k) Plan?
A Solo 401(k) will have the same downsides as a traditional 401(k), such as the penalties associated with withdrawing funds before 59 ½.
Once the plan is established, it will still fall to the employer to ensure the plan is in compliance with all rules and regulations. When the plan reaches over $250,000 in assets, Form 5500 must be filled out each year.
However, the financial advisor can help oversee compliance for the employer.
Our Solo 401(k) Advisors
If you are considering a Solo 401(k), Langan Financial Group is a fantastic option to help you achieve your retirement plan goals.
In order to strive to provide the best solo 401(k) option, we take a collaborative and engaging approach with employers to align the plan's design with the owner's financial goals.
We provide:
- Regularly scheduled plan reviews
- Regularly scheduled plan benchmarks
- Investment policy statement reviews
- One-on-one financial planning support
Our Solo 401(k) Free Benchmark
Our Solo 401(k) provider services focus on helping your employees better prepare for retirement.
In addition, we will benchmark business 401(k) plans to help ensure it is performing to the best of its ability. We will compare your solo 401(k) plan against other options available.
This free retirement plan review will:
- Review plan fees
- Review vendor services
- Review participant fees
- Review ERISA compliance
- Evaluate portfolio performance
Chat with a Solo 401(k) Advisor
Give us a call at 717-288-1880 to see how our local advisors can help with your retirement plans.
Or visit our solo 401(k) advisor contact page to fill out an inquiry.
FREE Benchmark Comparison Services
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Disclosure: Check the background of your financial professional on FINRA's BrokerCheck. The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Cambridge and Langan Financial Group, LLC. are not affiliated. Cambridge Investment Research Advisors, Inc. a Registered Investment Advisor. Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a broker-dealer, member FINRA/SIPC, to residents of: AL, AZ, CO, DE, FL, GA, IA, KY, MD, NJ, NM, NY, NC, OH, PA, TX, VA, WI Cambridge and Langan Financial Group does not offer legal advice. Estate planning services are in regards to your overall financial plan. Always be sure to speak to a legal professional in regards to specific legal matters. Fixed insurance services offered through Langan Financial Group.
Testimonial/Endorsement Disclosure: The testimonials may not be representative of the experience of other customers. The testimonials are no guarantee of future performance or success. All of the testimonials/endorsements are clients with the exception of Steven Martinez of York SPCA. There was no cash nor non-cash compensation for any of the testimonials provided.
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Address: 1863 Center St, Camp Hill, Pa 17011
Phone: 717-288-1880
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