What Is a Solo 401(k)?

You might assume that you don't have access to a 401(k) plan if you're a freelancer or an independent contractor but that isn't the case. You don't have to go without a 澳洲幸运5开奖号码历史查询:tax-advantaged retirement savings plan. You can sign up for what's called a𒐪 solo 401(k) or a self-employed 401(k).

Eligibility Requirements

To qualify for a solo 401(k), you must produce 🌃your income from your own business. And the business must be run by you alone, or you and your spouse.

澳洲幸运5开奖号码历史查询:Sole proprietors, small business owners without employees (except for a spouse), independent contractors, and freelancers typically fit this description. The business must also produce income. This is verified through your tax records.

If you meet these criteria, you can ope⛄n a solo 401(k) plan.

How to Set up a Solo 401(k)

1. Find Your Broker

You can open a solo 401(k) at most online brokers and traditional brokers or directly through a financial services company. You'll want to do some research ahead of time to identify the best solo 401(k) company for you.

2. Get an EIN

You'll need an employer identification number (EIN) to get started with the enrollment process. If you don't have one already, you can with the Internal Revenue Service (IRS).

The rest of the documentation will be pro🍃vided by the broker or financial services company you choose for the account.

3. Choose: Traditional or Roth?

To open a solo 401(k) plan, you have to adopt a plan in writing, making a written declaration of the type of plan you intend to fund. The choices are the same as those given to an employee opening a 401(k) plan: you can choose a traditional 401(k) or a Roth 401(k). Each has distinct tax benefits.

If you have a traditional 401(k) plan, you're investing with pretax dollars. That is, you're effectively claiming an immediate tax break for y🐟our contributio𒆙ns as you make them throughout your working years.

When you reach retirement age, you'll owe income taxes on the funds as you withdraw them. You'll pay taxes on your initial deposits as well as on the money your investments have earned over the years.

Keep in mind that most people are in a lower tax bracket after retiring than they were during their working years. If you anticipate b♒eing in a higher tax bracket, you might wind up paying a hefty extra amount in taxes down th𝓀e road.

Roth plans, on the other hand, are funded with after-tax dollars. You've already given the IRS its cut so your withdrawals are tax-free after you retire as long as you've had the account for over five years. This includes the money you paid in and the investment returns the account earned.

This could add up to a nice fat bank account for your retirement years. However, keep in mind that it's a bigger hit to your spending power during your working years.

4. Create a Trust

Once you have established the type of plan you want, you will need to create a trust that will hold the funds until you need them or you reach retirement age. You can select an 澳洲幸运5开奖号码历史查询:investment firm, 澳洲幸运5开奖号码历史查询:online brokerage, or insurance companᩚᩚᩚᩚᩚᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤❀ᩚ𒀱ᩚᩚᩚy to administer the plan for you.

5. Create a Record-Keeping System

You also need to establish a record-keeping system, so that your investments are accounted for properly.

Benefits of a Solo 401(k)

Solo 401(k)s provide some advan♋tages over other types of retirement accounts available to you.

Roth Option

One big advantage is the availability of the Roth option as well as the traditional version. With other self-employed retirement accounts, such as the Simplified Employee Pension (SEP) IRA, the Keogh plan, and the Savings Incentive Match Plan for Employees (SIMPLE) IRA, only the traditionalཧ option is of𓃲fered; there are no Roth options.

The regular IRA that's available to anyone with earned income is available in Roth or traditional versions, but the annual contribution limits are far lower.

High Contribution Limits

Another adv♊antage of the solo 401(k) is that it can accept contributions from both an employee and an employer. That is, if you have a solo 401(k), you wear both hats and can make contributions in both roles.

The contribution limits are adjusted for 澳洲幸运5开奖号码历史查询:inflation every year by the IRS.

You can contribute up to $70,000 for 2025, up from $69,000 in 2024, or 25% of your adjusted gross income, whichever is less. People age 50 and older can add an extra $7,500 a year as a "catch-up contribution" in 2024 and 2025.

Added Flexibility

The SEP IRA is an alternative retirement plan that is often recommended for small business owners. But the solo 401(k) has an advantage over the SEP: you can take loans from the plan before retiring. It's 澳洲幸运5开奖号码历史查询:generally not advisable to borrow from your retirement fund, but it's an option if you must.

The solo 401(k) has another advantage over the SEP IRA: you get to choose between a Roth and a traditional account. The SEP IRA can only be a traditional account.

Less Paperwork

The solo 401(k) is designed for use by sole proprietors, freelancers, and independent contractors. As such, it eliminates much of the paperwork and bureaucracy that go along with 澳洲幸运5开奖号码历史查询:setting up and managing a 401(k) in a corporation.

More Investment Options

You have a world of options to choose from in selecting how to invest your money for retirement. Most companies offer their employees a limited selection of funds from a single financial services firm. You have no limits except for a few that 澳洲幸运5开奖号码历史查询:the IRS imposes. You can't play the derivatives market or invest in stamps or comics, for example.

Otherwise, you can invest in stocks, bonds, mutual f🔯unds, exchange-traded funds, and many other types of investments.

Alternatives to a Solo 401(k)

There are basically 澳洲幸运5开奖号码历史查询:two options in addition to the solo 401(k) for freelancers and independent contractors who want to 澳洲幸运5开奖号码历史查询:save for retirement and get the tax advantages that accompany these IRS-approve꧙d options:

• The SEP IRA is designed to be an easy, flexible option for small businesses with employees. It works much like a traditional IRA but has higher contribution limits. The limits are the same as for the Solo 401(k): $69,000 for 2024, increasing to $70,000 in 2025. Your contribution cannot exceed 25% of your gross adjusted income, however, and no catch-up contribution is allowed for those age 50 or older. No Roth option is available. A SEP IRA can be opened through any brokerage or bank.
• The 澳洲幸运5开奖号码历史查询:Keogh Plan is open to sole proprietors, partnerships, and limited liability companies and is often used as a profit-sharing vehicle for professional practices such as doctors' and lawyers' groups. It has the same contribution limits as the SEP IRA and the Simple 401(k) but poses a greater administrative burden. There is no Roth option.
• The 澳洲幸运5开奖号码历史查询:SIMPLE IRA is designed for businesses with 100 or fewer employees. It is open to sole proprietors but has a lower contribution limit than the Solo 401(k) or the SEP IRA. The maximum contribution is up to 3% of salary plus $16,500 in 2025, up from $16,000 in 2024. There is no Roth option.
• Finally, 澳洲幸运5开奖号码历史查询:the regular IRA is available to all earners. The limit is $7,000 for 2024 and 2025. You're allowed a catch-up contribution of $1,000 if you're age 50 or older.

The Bottom Line

If you are self-employed, you have several options for saving for retirement while saving on your taxes. You don't have to settle for a regular IRA, which is available to anyone with earned income but sets the maximum annual contribution at a comparatively low level.

Instead, you can opt for one of several types of retirement plans that have 𝓰much more generous limits with similarly generous tax benefits. The solo 401(k), the SEP IRA, the Keogh plan, and the SIMPLE IRA all are possibilities.

However, the solo 401(k) is the only option that offers you a choice of a Roth account or a traditional account, while still allowing for the maximum yearly contribution available among tax-advantaged retirement plans.