Everything You Should Know About 401(k) Plans for the Self-Employed

As a solopreneur, you’re used to being self-sufficient. Whether you’re running a coffee stand or managing a portfolio of freelance clients, you’re taking your income into your own hands. But what about your retirement savings?

Solo 401(k) plans, or individual 401(k) plans, are a popular option for sole proprietors and self-employed individuals (including freelancers who file their taxes as a business owner). This type of retirement plan may be your key to a more successful financial future.

What Is a Solo 401(k)?

A Solo 401(k) is a retirement plan for people who are self-employed. It’s also sometimes referred to as an Individual 401(k), Uni-401(k), one-participant 401(k), or self-employed 401(k) plan. If you’re a self-employed individual enrolled in a Solo 401(k), your spouse can also participate if they work with you.

To be eligible, you must earn your income as a sole proprietor or own a small business without employees. Self-employed individuals who also work full time for another employer may open this type of retirement plan using self-employed income from their business. However, individuals in this situation should keep limits on elective deferrals in mind, as these limits are specific to the person rather than the plan.

Types of Solo 401(k) Plans

As with a standard 401(k) plan, there are two types of contribution options in a Solo 401(k): traditional and Roth.

• Traditional 401(k): When you open a traditional 401(k), you defer pre-tax contributions. That means you’ll pay taxes on that money when you retire.
• Roth 401(k): You defer post-tax dollars to a Roth 401(k). So, you won’t have to pay taxes when you withdraw that money in retirement. Just keep in mind that any match and profit-sharing contributions are pre-tax. Earnings on Roth 401(k) contributions may be subject to taxes depending on qualifying conditions.

Choosing the best 401(k) plan for you depends on your personal financial situation. Consider speaking with a financial advisor prior to opening a plan.

Contribution Limits

Each type of retirement plan will have a different contribution limit. Self-employed individuals contributing to a Solo 401(k) can contribute as both the employer and employee. According to the IRS, those contributing as an “employee” can contribute up to $20,500 per year (2022). Those age 50 and older can contribute up to $27,000. When contributing as an “employer,” you can contribute up to 25% of your net earnings.

What Are The Benefits of a Solo 401(k)?

You might be comparing a Solo 401(k) to other retirement savings options for the self-employed, such as an SEP IRA. Each type of retirement savings option will have its perks and drawbacks, so do plenty of research before choosing the right option for you. Here are a few key benefits of a Solo 401(k).

Favorable Contribution Limits

The Solo 401(k) has a higher contribution limit than an individual retirement account (IRA), so many solopreneurs may find that appealing.

A Plan for Your Spouse

While Solo 401(k) plans are for self-employed individuals without employees, your spouse is the exception. If your spouse is paid by your business with you, they can participate in the plan as well.

Tax Perks

Taxes can be overwhelming when you run your own business, but opening a Solo 401(k) may have some tax perks. Contributions to your account are tax-deductible, as are any associated maintenance fees. Again, you also have the option to enroll in a traditional or Roth plan depending on your financial situation.

Simplified Setup

Employer-sponsored 401(k) plans come with quite a bit of paperwork, but you’ll likely find this isn’t the case for a Solo 401(k). Enrollment is usually more straightforward, and ePlan Services’ Plan Establishment tool takes this simplicity to the next level. All you need to do is spend 15 minutes filling out your information, and we’ll get your plan up and running in as little as a day.

How Do You Enroll in a Solo 401(k) Plan?

Ready to get started? ePlan Services’ Solo(k) plan is an all-in-one 401(k) solution for self-employed businesses, including business owners who employ their spouse. If you’re interested in learning more about Solo(k), contact our sales team today. An ePlan team member will help you set up your 401(k) and complete all your documents, so you can start contributing right away.