When you believe in yourself, your retirement account should reflect that believe and optimism so you can maximize your retirement savings. Therefore, your options must have unlimited investment options, high contribution limits, and ultimate flexibility. The Solo 401k is just that.
Your Solo 401k gives you amazing flexibility and power towards long term wealth building. It begins with a combination of tax deferred growth and high payroll deductions. Being self-employed enables generous employer contributions (your business generously funds your retirement) that includes tax benefits for your business.
What’s Special About a Solo 401k
There are several self-employed retirement vehicles out there. However, for high salary earners, the Solo 401k makes the most sense to maximize retirement savings.
The Solo 401k offers unique advantages you can’t find with any other tax deferred retirement accounts. Compare the Solo 401k to other tax deductible retirement accounts:
- If you and your spouse both contribute to the Solo 401k plan, you can each contribute $56,000 (or $62,000 if age 50 or older). More than twice what is available from other plans.
- Solo 401k plans allow loans direct to the participant. You can borrow up to 50% of your account value or $50,000 (whichever is lower) tax free and without penalties. It offers both immediate tax savings and a source of funds for an emergency or for profit generating uses.
- The ‘over age 50’ catch up provision is the most generous of all federal retirement plans. It allows an extra $6,000 in tax free deposits compared to $1,000 or $3,000 for SEP IRS, IRAs, or SIMPLE IRS
- Annual funding is flexible. Once established, you can fund it to the max each year or anywhere between zero and the max. There is no minimum funding requirement.
- Easy to establish and maintain. Unlike the traditional 401k, there is no discrimination test required to establish the account. IRS form 5500-EZ only needs to be filed annually after the value of the account exceeds $250,000.
How to Qualify
The simple requirement is being self-employed (part time counts) without full time employees (partners and spouses are exceptions). You can roll funds into your Solo 401k account from any other retirement accounts that you have including SEP IRA, Profit Sharing, Money Purchase, Rollover IRA, Traditional IRS, SIMPLE IRA, or accounts from a previous employer’s traditional 401k, 403b, or 457b.
Almost everyone can use a Solo 401k to maximize retirement savings, especially through big tax deductible contributions.
Consider the Roth Solo 401k
Instead of the tax deferring Solo 401k account, the after tax Roth Solo 401k might be more suitable to your specific needs. The Roth Solo 401k account was created in 2006 when Congress essentially merged two of the most popular retirement accounts – the Roth IRA and the Solo 401k.
A Roth retirement account is one where you pay the taxes on the income before depositing it into the account. The advantage comes from the fact that after you have paid taxes on the income, you don’t pay taxes on the earnings in the Solo Roth account. This works especially well for people expecting to be in a higher tax bracket after retirement or will grow their retirement account much larger than their personal contributions and want to avoid taxes on the earnings. The Roth Solo 401k can seriously maximize retirement savings.
Maximize Your Retirement Tax-Free
A Roth Solo 401k retirement account might be for you if you meet any ONE of these scenarios:
- You foresee being in a higher tax bracket after retirement. Therefore, you benefit by paying taxes up front and withdrawing the funds tax free when you are in the higher bracket.
- You are relatively young and earning a lower income today than you expect to in the future. The Roth Solo 401K lets you pay a lower tax today and substantially grow your retirement fund into a large nest egg that you can withdraw from tax free at a later time.
- You’re having an unusual few years of lower earnings but expect your income to return to a much higher level in the near future. You can benefit for a short time by establishing a Roth Solo 401k during the down years (lower tax rate) and draw on it when you are in a higher tax bracket.
Investing Your Solo 401k Funds is Only Limited by Your Imagination
What you can invest your Solo 401k retirement fund in is virtually unlimited. Invest in real estate, which is always a trustworthy favorite.
Alternatively, you can make loans to other businesses paying high interest rates. Say ‘no thanks’ to banks offering 1.5% interest on five-year CD deposits.
You can make personal loans to unrelated persons. Or maybe consider buying foreign stocks. You can even tap into your retirement account to fund your own business (but make sure you follow the rules carefully on this one!).
Unique to your Solo 401k, you can also invest in life insurance – something you can’t invest in with a self-directed IRA.
Other Reasons to Consider Tax-Free Roth Growth
- You believe that federal income taxes will increase in the future and be applied to retirement accounts.
- Your traditional pre-tax retirement account is funded to a point that adding to it further will likely result in pushing you into a higher tax bracket based on mandatory distributions after retirement. This can be especially beneficial if tax rates rise in the future.
- You make too much money to have a Roth IRA. Roth Solo 401ks do not have an income limit.
- Avoid or reduce taxes on social security benefits. Adjusted gross income thresholds determine tax liability on social security benefits. Up to 85% of your benefits are subject to taxation if your income is more than $34,000 (individual) or $44,000 (couple).
- Avoid mandatory distributions in order to pass a larger tax free inheritance on to your heirs. Because the government cannot collect taxes on Roth 401K distributions, Roth Solo 401ks do not have mandatory distributions at age 71 1/2 as long as you are still working for a business that you own less than 5% of.
Every Solo 401k by Nabers Group automatically includes a Roth 401k sub-account at no extra charge.
Maximize Your Retirement Savings Through Smart Investments
The list of possible investments goes way beyond the scope of this one blog but here are more possibilities:
- Promissory notes
- Private limited partnerships, limited liability companies, and C corporations
- Foreign currencies
- Oil and gas investments
- Publicly traded stocks, bonds, funds
- Private stock offerings, private placements
- Judgments/structured settlements
- Factoring investments
- Accounts receivable
- Equipment leasing
But don’t let this short list limit you. As long as you follow the few simple rules set by the IRS, nearly any investment can be held within a Solo 401k retirement account. The Solo 401k is all about EMPOWERING YOU to maximize retirement savings.
Have questions about a Solo 401k? The experts at Nabers group will help you get your retirement funds into your control, where they belong. Contact us here.
I really enjoyed reading your blog post on maximizing retirement savings with a solo 401(k)! The information you provided was clear, concise, and packed with valuable insights.
I particularly appreciated your emphasis on the benefits of a solo 401(k) for self-employed individuals and small business owners. Your explanation of the contribution limits, catch-up contributions, and potential tax advantages of a solo 401(k) was extremely helpful in understanding how this retirement plan can be a powerful tool for building long-term wealth.
I also found your tips on maximizing contributions, such as utilizing the employer and employee contributions, and exploring the Roth option, to be practical and actionable. These strategies can make a significant difference in retirement savings over time.
Furthermore, the section on investment flexibility and the potential for tax-free growth within a solo 401(k) was eye-opening. It highlights the importance of understanding and leveraging the investment options available within this retirement plan.
Thank you for providing such valuable information and insights on maximizing retirement savings with a solo 401(k). Your blog post is a great resource for individuals looking to secure their financial future through smart retirement planning. Keep up the excellent work!