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Houston County Living

Is a Solo 401(k) right for you?

Sep 01, 2021 09:56PM ● By Griggers Wealth Management
Are you self-employed? Are you saving enough for your retirement? There may be a simple way to add more to your retirement. 

A “Solo 401(k)” is a 401(k) plan that is designed for business owners, allowing you to invest for both yourself and your spouse’s retirement. In a Solo 401(k), the business owner wears two hats. The first is as the employer and the second is as the employee. 

As an “employee,” you can receive salary or bonus that can be deferred into a 401(k) plan. If you elect to contribute to the plan, then these “elective deferrals” are deductible (not subject to current income tax) but they are subject to FICA and FUTA payroll taxes. As an employee, you’re limited to $19,500—but, if over age 50, can contribute an additional $6,500.

As the owner/employer, you can also contribute to the plan. For example, in 2021, the deductible contribution is limited to 25% of the employee’s compensation. These contributions are not currently taxed to the employee.

In 2021, total 401(k) contributions are limited to the total employee’s compensation or $58,000. That includes both employer and employee contributions. Of course, the assets grow on a tax-deferred basis and when it comes time for distributions, they are generally taxed as ordinary income. 

Regular 401(k) plans must meet nondiscrimination tests, but, with no other employees, you avoid this issue. However, you cannot have an eligible employee besides your spouse. Otherwise, it changes all of the rules and you are subject to normal 401(k) restrictions. 

Ask your financial advisor to review with you the different types of pension plans available to you as a self-employed business owner. You may find the one that works best for your particular business situation.

Billy Griggers, CLU ChFC
Securities and advisory services offered through LPL Financial, a registered investment advisor, Member FINRA/SIPC.