The risks and rewards of self-employment are numerous. But just because you are self-employed, doesn’t mean you have to do everything on your own. Various entities can assist you along the way, especially in terms of your retirement planning.
If you are considering starting a retirement plan as a self-employed individual, you should strongly consider a Solo 401k. A Solo 401k provider can help you in selecting the best plan for you and your business needs.
How Does a Solo 401k Work?
A Solo 401k is a retirement fund option for self-employed individuals. The primary requirement for starting this type of retirement plan is that you do not have any employees.
This type of plan is extremely beneficial for the self-employed, as it allows you to contribute to your retirement plan as both an employee and business owner.
The ability to contribute from both directions (employee and employer) has huge tax implications, both in the deductible amount and in that you can choose when to pay taxes by structuring your plan as a “Traditional” or ‘Roth” Solo 401k.
Additionally, you are afforded significant flexibility when it comes to loans in a Solo 401k. Because self-employed individuals are not expected to have many options to tap into in the case of an emergency, the Solo 401k plan allows the individual to take out loans to the tune of $50,000 or half of the available value in the plan (whichever amount is less). It is obviously good practice to keep fund in your account for as long as possible to allow them to mature, however, in times of great difficulty or uncertainty, you have the option of using these funds to stay afloat.
What is the Process for Opening a Solo 401k?
There is a simple step by step process involved in opening a Solo 401k:
- Select Your Solo 401k Provider. You’ll want to select a Solo 401k provider who fits your needs. A provider should be based on a variety of factors including: cost of plans, customer service options, customization capability, and ease of use on the provider’s platform.
- Complete Your Solo 401k Application. Follow the step-by-step application process.
- Select From “Roth” or “Traditional” Options. Weigh your options and determine whether you would benefit more from the “Traditional” or “Roth” option for your Solo 401k.
- Start Contributing. Determine which type of contributions you would like to invest in such as stocks, bonds, mutual funds, and other options.
- Complete the Process in a Timely Manner. Remember again that you can contribute as both an employee and an employer, which come with different deadlines. Employees must make contributions before January 1st, but employers have some extra time to contribute; up until the April 15th tax deadline.
From this point on, you’ll need to keep on top of what you need to fill out and when. Your Solo 401k provider can help walk you through the process and for what dates and deadlines you’ll want to remember.
Bottom Line
As a self-employed individual, you should make the most of the options afforded to you. A Solo 401k is one of the best perks available to the self-employed.
