Roughly 16.5 million Americans are self-employed. If, like me, you’re among those working for themselves, you have access to a powerful savings tool that can save you thousands of dollars in taxes each year. It’s called a solo 401(k), and it’s available only to self-employed individuals or small business owners with no full-time employees other than themselves and their spouses.
Over the years, I’ve habitually socked money away in my solo 401(k). But I’ve recently decided to dive in, taking full advantage of all the retirement plan has to offer — and saving a bundle of money for my golden years. Here’s why.
A solo 401(k) has higher contribution limits
My husband and I work, meaning we get slammed with income taxes each year. But a solo 401(k) helps offset the amount we have to pay in taxes by allowing me to contribute a higher percentage of my income to this type of brokerage account than I would be able to contribute to a standard company-sponsored 401(k).
For example, if I were still working for a large corporation and contributing to a 401(k) plan through my company, I would have a contribution limit of $22,500 plus an over-50 catch-up contribution of $7,500. That’s a total of $30,000 I could contribute and not pay taxes on until I withdraw funds.
With a solo 401(k), I can contribute up to $73,500 annually since I’m over 50. That provides me with a huge savings opportunity. Let’s say I earn $100,000 a year and contribute $50,000 to my solo 401(k). That means I’m only paying income taxes on $50,000 of my annual earnings, and I have another $50,000 growing in a retirement account.
I get to self-direct my investments
When I worked in corporate America, my retirement plan restricted me to a select number of investments. I was pretty much stuck if I didn’t like what the plan offered. However, a solo 401(k) allows me to direct where my retirement money goes. I can invest in private equity, tax liens, real estate, mortgage notes, precious metals, or anything else I believe will earn money.
I can borrow against it
Say I needed a quick injection of cash to expand my business, pay for college, or even buy a house. With a solo 401(k), I can borrow up to $50,000, or half my account balance, with no credit check. Given how hard I work to make regular contributions, I can’t imagine borrowing against those funds. Still, it’s good to know that I have access.
I have the option of a Roth plan
A Roth plan allows an investor to make deferred contributions to a retirement account using after-tax dollars. In other words, I would pay taxes on my income today but withdraw the funds tax free in my retirement years. And unlike a Roth IRA that restricts higher-income individuals from investing, the Roth component of a solo 401(k) has no income restrictions.
I don’t have to make a call
When I want to change something about my 401(k), like rebalancing my portfolio, I don’t have to call someone and ask them to do it for me. Better yet, I don’t have to pay anyone to do it for me. I have the freedom I need to make investments and changes on my own.
Yes, I’ve taken advantage of my solo 401(k) in the past, but 2024 is the year I use it to minimize taxes like a miser.
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