Solo 401K Investment Option

There’s a lot of good to be said for being self-employed. The ability to make your own money off your own blood, sweat and tears in America is priceless. However, there are work related benefits the self-employed miss out on. The list of these terrific benefits includes employer sponsored-paid benefit plans like vacation pay and retirement investment opportunities.

With that said, there is in fact a 401K option specifically designed as a retirement savings option for small business owners. It’s not something that’s universally known but after the following discussion, readers should have a clear idea of how this government sponsored retirement savings option works.

Solo 401k
Solo 401k Information

What is a Solo 401k?

As indicated above, a Solo 401k account is a retirement investment account designed for small business owners who have exactly zero employees. There’s is one exception to the no employee rule – a spouse can be employed and participate in the Solo 401(k) program.

In most aspects, this type of investment account functions in much the same way as a traditional 401(k) account. All contributions are made with pre-tax dollars.

Solo 401k FAQs

When addressing contribution limitations, it’s important for the business owner to view themselves as both the employee and the employer. As the employee, they can contribute up to $19,000 of their salary/wages in 2019 with a catch up provision of $6,000 a year for taxpayers who are 50 years of age or older.

As the employer, the individual can contribute up to 25% of net income from the business with the net income compensation limit set at $280,000. Between the employee and employer contributions, the total allowable contributions in 2019 will be $56,000 for the small business owner.

If the spouse is employed in the business, they are entitled to the same contribution limits. When filing a joint return, the total family contribution cannot exceed $112,000.

One of the truly nice benefits of this option is the individual can actually choose their applicable tax advantage. They can choose the traditional option with all contributions and associated earnings tax-deferred until they start taking distributions. With every distribution under this option, the individual becomes responsible for paying taxes at their individual statutory tax rate for the applicable tax year.

The other option follows Roth guidelines. Under these guidelines, the individual pays their taxes upfront but is subsequently allowed to take all distributions tax-free. That would include any amounts earned from investment.

It’s noteworthy that under both options, the individual will be assessed a 10% penalty on any distributions taken before the age of 59 1/2.

As the employer, the individual can contribute up to 25% of net income from the business with the net income compensation limit set at $280,000. Between the employee and employer contributions, the total allowable contributions in 2019 will be $56,000 for the small business owner.

If the spouse is employed in the business, they are entitled to the same contribution limits. When filing a joint return, the total family contribution cannot exceed $112,000.

Each Solo account holder is responsible for trying to maximize their retirement savings while investing their 401(k) monies. It behooves the business owner to set up their qualified plan with a brokerage firm that has the capacity of offer a wide range of investment options. Any investment option approved by the IRS is fair game. That would include, stocks, bonds, mutual funds and some forms of real estate investment.

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