Entrepreneurs already know that there are plenty of options to create a retirement account. These plans, SEP and SIMPLE IRAs, can be the right answer for some business owners.
However, the Solo 401(k) (also known as Solo-k, Uni-k, One-participant k) may allow you to set aside more money for retirement. You have the opportunity to create a Traditional or Roth account as well as make both employee and employer profit-sharing contributions. You’re also allowed to make solo 401(k) contributions for your spouse, as long as they work in your business. A 401(k) can potentially turbocharge the retirement income your business generates.
Per the IRS, “The business owner wears two hats in a 401(k) plan: employee and employer. Contributions can be made to the plan in both capacities. The owner can contribute both:
- Elective deferrals up to 100% of compensation (“earned income” in the case of a self-employed individual) up to the annual contribution limit:
- $19,500 in 2021, or $26,000 if age 50 or over; plus
- Employer nonelective contributions up to:
- 25% of compensation as defined by the plan, or
- for self-employed individuals, see this calculation.”
Critical questions to consider include:
- What kind of contributions do I plan to make to my retirement account?
- Have I discussed coordinating plans with my spouse who also works in my company?
- Do I understand the pros and cons of the various self-employment retirement plans available to me?
- How do I fit such a retirement plan into my overall financial plan?
- What is my best option to potentially maximize tax efficiency now and in the future?
