A Solo 401(k) is a great way to save for retirement while getting tax benefits. One of the best ways to take advantage of your benefits plan is to make regular contributions. This is often overlooked. If you have a Solo 401(k), here are a few tips about making contributions: – You can contribute up to $18,500 annually, plus an extra $6,000 if you’re over 50. – You can make contributions in one lump sum or spread them out throughout the year. – If you have a business with employees, you can still make Solo 401(k) contributions as long as you contribute an equal amount for each employee.
Why A Solo 401k
Why consider a solo 401k over a SEP IRA or other retirement savings options for the self-employed? It depends on your circumstances and how much you can save.
Let’s take a look at this scenario. A man saved money in a SEP IRA because his income was lower, and he was still able to contribute the maximum amount to his 401k at work, so he did not need any additional employee contributions.
Both a SEP and a Solo 401k allow an employer to contribute $5,576.11 on $30,000 of income. Since he was already earning $20,500 at his primary employer, the amount didn’t make a difference.
The business has grown significantly, and now his wife works for the business. So it can save us a lot of money and lower our taxes. We can assume that the business will make $100,000 this year. That means the business can contribute a total of $18,587.05 to both the husband’s and wife’s 401ks. In addition, his wife can contribute $20,500 of her salary to the 401k.
Since the solo 401k provides more savings options and lower taxes, it is a better choice than other options. You can make more money when you are self-employed because you can make both employer and employee contributions – up to the limits!
What To Look For In A Solo 401k
I’ve learned a lot about what to look for while shopping around for a solo 401k provider. When shopping for a 401k, there are a lot of options and nuances to look for. There are two types of 401k plans – prototype plans which are generic and offered by “free” providers, and custom plans created by third-party providers, which cost more.
Whoa, that sounds confusing, and it can be. You need to consider the following when choosing a provider for your solo 401k:
- Does the 401k provider offer both Roth and Traditional contributions?
- Does the 401k provider offer after-tax contributions to do a mega backdoor Roth IRA.
- Does the 401k provider offer loans from the plan?
- What types of investment options are allowed in the plan (i.e. can you invest in alternative assets like real estate, startups, or even cryptocurrency )?
- Does the provider allow rollovers into the plan and rollovers out of the plan?
- The costs to maintain the plan
- The costs to invest within the plan
When shopping for a solo 401k provider, you should compare various aspects based on your specific wants and needs. If you’re looking for a retirement savings plan for your small business, a solo 401k may be a good option for you. In this article, we’ll compare some of the main firms that offer solo 401ks.
10 Tips About Solo 401(k) Contributions
1 – Generous Contribution Limits
The contribution limit for a Solo 401(k) in 2021 is $58,000. In 2022, this number will bump up to $61,000.
For plan participants age 50 and older, an additional $6,500 can be added, raising the maximum to $64,500.
There are two ways you can put money from your business into your retirement plan – money that your employees put in and money that you, as the employer, put in.
2 – Employee Contributions
You can set aside money from your paycheck to go into your retirement account through an employee deferral.
You can claim the income amount as compensation from your business but then set it aside in your retirement plan rather than take it personally.
You can choose to make your deposit to the plan on either a tax-deferred or Roth basis.
The amount an employee can contribute is limited to $19,500, with an additional $6,500 contribution allowed for those aged 50 and over.
Contributions that employees make can be up to 100% of their eligible compensation. Eligible compensation is their W-2 wage if they are taxed as a corporation or the net business income after self-employment taxes in a pass-through environment.
In a low-income business, employee deferral is the best option for funding plan contributions because it can access all of the available income.
3 – Employer Contributions
Your business could also help contribute to your plan by sharing in the profits.
The amount of this contribution that can be made to the plan is up to $58,000 and is based on a percentage of income.
In a pass-through environment, you can make contributions from your net business income, which is your gross income minus your operating expenses minus half of your self-employment taxes.
The business makes a contribution to the plan, which is then used as compensation for the employee. This eliminates the need to pay self-employment taxes. High earners typically prefer to use profit sharing to contribute because they can save money on self-employment taxes.
If a business wanted to make the maximum possible profit-sharing contributions, it would need to have a net business income of $290,000.
The maximum amount of profit sharing that can be taken from W-2 wages is 25%. Shareholder distribution income may not be used for plan contributions.
4 – Combining Contributions
You can reach your savings goal by combining employee and employer contributions.
If you are age 50 or older, you can contribute an extra $6,500 for a total of $26,000.
If you are looking to contribute to a Roth plan, you will probably contribute most of the money yourself rather than relying on your employer.
Most other investors will want to contribute the maximum amount allowed through profit sharing and then make up the rest of their savings goal through employee deferrals.
5 – Roth Contributions
You can choose to set aside money for employee contributions on a tax-deferred (Traditional) basis or on a tax-free Roth basis.
You can contribute to a Roth IRA even if your income is too high to qualify for a traditional IRA. You are able to put up to $19,500 into your Roth 401(k) plan or $26,000 if you are age 50 or older.
6 – If You Participate in More than One 401(k)
If you are self-employed and have a Solo 401(k), you will need to think carefully about employee deferral contributions if you also have a job with an employer that offers a Solo 401(k).
You can only contribute $19,500 (or $26,000 if you are 50 or older) to your retirement plan, which is spread out across all the plans you are enrolled in. You have the option to make a full contribution to one plan or split your contribution across multiple plans. You can only contribute income from a specific employer to that employer’s plan.
If your other employer offers matching contributions, it’s essentially free money, and you should take advantage of it. Some employers will offer a percentage match up to a certain limit for employee contributions, but this limit may be lower than the full employee contribution limit.
If your company only matches a certain amount of money, you may want to contribute more than that to your own retirement plan. Choose the plan you would rather have the money available to invest in if there is no matching.
Employer matches and profit-sharing contributions are separate across plans. You can put more money into profit sharing in your Solo 401(k) than your employer offers, based on your eligible income.
7 – Making Solo 401(k) and IRA Contributions
If you have an individual Traditional or Roth IRA, your Solo 401(k) will not be impacted.
The reverse is not true, however. If you have a retirement plan through your employer, you may not be able to have a separate IRA.
You can always contribute to a tax-deferred (Traditional) IRA. You may not be able to deduct your contributions based on your income and tax-filing status. This means that the money you contribute to your non-deductible IRA will be taxed in the year you contribute it, but any earnings on that money will be tax-deferred until you withdraw it.
If you are self-employed and have a moderate income, you may not be able to reach your full savings goal with the Solo 401(k). In this case, you may want to consider making a contribution to a separate IRA and then rolling it over to the Solo 401(k).
You can make contributions to a Roth IRA even if you’re participating in your own Solo 401(k). The problem is that you can’t put money into a Roth IRA if you make too much money, depending on how you file your taxes. Although the Solo 401(k) has features that allow for significant Roth contributions, it is unlikely that someone would have enough income to max out the 401(k) Roth and still be eligible to separately contribute to a Roth IRA.
There is not often many benefits to a parallel Roth IRA strategy if you have access to a Solo 401(k) because Roth IRA contributions cannot be rolled over to a Solo 401(k).
Prototype “Free” Solo 401k Plan Providers
E-Trade Solo 401k
E-trade offers the ability to contribute to a 401k both traditionally and through a Roth account. They also allow loans under their plan.
They accept rollovers of any kind into the plan.
There are no set-up fees for creating a solo 401k through E-Trade. The 401k at E-Trade has a $0 commission per trade. However, they also offer a large number of mutual funds with no fees.
TD Ameritrade Solo 401k
TD Ameritrade offers a free solo 401k plan that has no prototype. Although it is difficult to understand their plan, we found out the following after speaking with them.
After July 2022, the only contributions that the TD Ameritrade solo 401k plan will allow are our traditional contributions. This is because of the Schwab-TD Ameritrade merger; Schwab only allows traditional contributions, and it looks like TD Ameritrade will be using the same plan going forward.
This means that TD Ameritrade will no longer allow loans from solo 401ks, and existing loans will need to be repaid.
After reviewing their plan document, it appears that the only types of accounts that can be rolled over are 401(a), 401(k), 403(a), 403(b), 408, and 457(b) accounts.
The company’s 401k plan offers a wide range of investment options. For example, they offer Vanguard ETFs commission free.
There are no additional fees for setting up or maintaining an account with TD Ameritrade. All regular stock, ETF, and options trades within the 401k are subject to the standard commission of $0. However, Vanguard offers other ETFs commission-free as well.
Fidelity Solo 401k
Fidelity doesn’t offer a full-service solo 401k option. Although their current “free” solo 401k does not offer a Roth contribution option, it does offer 401k loans. The representative said that the policy change was to save the company money on maintaining the plan since they don’t charge anything to set up a solo 401k.
Fidelity offers a wide variety of investment opportunities, including commission-free ETFs, mutual funds, stocks, and bonds.
Fidelity also allows you to roll over your IRA into the plan, which can be a great strategy for doing a backdoor Roth IRA. However, they don’t allow in-service distributions from the plan. Only E*Trade potentially offers this.
The Fidelity solo 401k is cheap. There are no setup fees or annual maintenance fees. Within the Fidelity solo 401k, trading commissions for stocks, ETFs, and options are all $0. We believe that Fidelity is one of the best free investment brokers for long-term investors because it offers a wide range of features and services.
Vanguard Solo 401k
Vanguard is a popular choice for a solo 401k because it is well-known for having low fees. This means that we can expect them to be a very low-cost provider.
Vanguard offers both Traditional and Roth IRA options for their 401k Solo plan. They have recently started to allow rollovers from existing IRAs into the Solo 401k plan. However, they still don’t allow loans from their plan.
You can only invest in Vanguard mutual funds if you participate in their solo 401k. This limits investment options quite a bit.
Charles Schwab Solo 401k
Schwab is another discount brokerage that offers a free solo 401k plan.
Schwab does not offer Roth 401k contributions as part of their retirement plan. They also do not offer loans under their plan. Additionally, they do not allow for after-tax contributions to be made to the plan.
Based on the information given, it seems that you can rollover a 401k into your Schwab solo 401k, but you cannot rollover an IRA into your solo 401k.
Schwab provides numerous investment options, including Vanguard mutual funds and commission-free ETFs.
In conclusion, if you haven’t already done so, now would be a great time to open a solo 401(k). It will allow you to contribute more money than you could otherwise, and it also gives you the flexibility to choose from among different investment options. And since you won’t have any coworkers to answer to when it comes to contributing to your retirement account, you’ll have even more freedom to invest wisely.
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