When it comes to retirement plans for the self-employed, the plan with the most benefits and options is the Solo 401k. It comes with more alternative investment options than any other plan. It also comes with the golden benefit that allows you to work longer but at your own pace to keep your Solo 401k active as a way to continue minimizing taxes. There are many more reasons why you might want to do this, which we explain here.
Entrepreneurs Become Wealthy Later in Life
The hallmark of an entrepreneur is starting a business from the ground up. The early years are about getting the business off the ground and scrambling to survive. Then momentum builds, and opportunities are created. As profits begin to build, they are plowed back into growing the business.
These are years when retirement plans for the self-employed are beginning to be considered but never at the front of mind. Often no more than an occasional small contribution to an IRA but business profits are not yet enough to take advantage of a high contribution Solo 401k that can compound tax savings and contributions into a wealthy retirement.
Then, after many years of funding growth, the entrepreneur’s business is spinning off more profits than are needed to expand the business. The kids have finished college and struck out on their own. Your personal bank account is growing fat, and life is good. Until… you realize how little has accumulated in your IRA as you draw closer to retirement… and a big whooping income tax bill is staring you in the face.
Now is when you could use a Solo 401k retirement account with a generous $67,500 tax write-off for 2022!
Among the retirement plans for the self-employed, the Solo 401k is the most robust way to grow retirement capital in a short amount of time. After years of building a money engine, retirement wealth begins with a solid capital foundation for reliable investments to build upon. This is no time for aggressive and questionable tax shelters or high-risk investing. Instead, the Solo 401k delivers tried and trusted tax benefits and reliable alternative investment strategies like real estate, tax liens, and private placement. The Solo 401k is the best-proven method for an entrepreneur to stash a large number of retirement funds in an ERISA-qualified plan.
The Solo 401k for Wealth Building Later in Life
With a 20-year history, the Solo 401k has proven to be a successful means of sheltering large amounts of tax-deferred and/or tax-free self-employment money for retirement. Your early retirement years might be based on a corporate pension, but that doesn’t mean you still can’t build true wealth and even legacy wealth for your later years and family.
A Solo 401k plan participant can continue making contributions regardless of age if you are still working. In other words, if you’re still an employer with a Solo 401k retirement plan, you can continue making contributions to your employer-sponsored Solo 401k.
What makes the Solo 401k stand out from other retirement plans for the self-employed is that it is available only to self-employed workers with no full-time employees, with an exception for business owners who employ their spouses.
You’re allowed to make two types of contributions to your Solo 401k: 1. an employee contribution, 2. an employer contribution. Your employee contribution limit is $20,500 in 2022, or 100% of compensation, whichever is less. Those 50 or older get to contribute an additional $6,500 ($27,000 total). As your own employer, you can also make an additional profit-sharing contribution of up to 25% of your compensation or net self-employment income, which is your net profit less than half your self-employment tax and the plan contributions you made for yourself. All of this totals to a generous $67,500 tax write-off for 2022! Generally, these limits increase each year to account for inflation.
Age Of The Self-Employed
There are no age or income restrictions, but you must be a business owner with no full-time employees. Although you cannot have full-time employees, you can have contract employees and part-time employees that work less than 1000 hours per year and receive W2 wages. However, your spouse can be an employee and a Solo 401k plan participant. This can double your annual contribution up to $135,000. Test your eligibility!
To open an account, Nabers Group provides an employer identification number (EIN) from the IRS along with all the needed trust documents that will be generated in 1 business day or less. You are the Trustee of your Solo 401k plan. There is no need to hire, pay, and wait for a custodian to hold your assets. You get “Checkbook Access” built-in, without the need to register any LLCs. This gives you complete control over what you invest in, how much, and when.
Another thing that makes the Solo 401k stand out from other retirement plans for the self-employed is if you find yourself in need of cash at some point during semi-retirement (or any time), you can take a loan from your Solo 401k just as you can from a traditional 401k. This can be for the lesser of 50% of your balance or $50,000.
The Solo 401k is a Smart Entrepreneurial Play
The Solo 401k is your opportunity to continue working enjoyably at any age while keeping your Solo 401k active to reduce taxes through contributions. The favorable tax treatment is reason enough to keep your Solo 401k working for you but there are many more benefits to be had.
Entrepreneurs are subject to enough risk running their businesses. Any excess funds they can set aside for retirement are better suited to being protected from further risk, particularly when retirement is close at hand. You are probably well aware of the volatility of Wall Street investing and how risky it can be during retirement years. A main feature of the Solo 401k is that it allows countless alternative investments. Real estate investing for passive and reliable income has long been the darling of Solo 401k investors. But Solo 401k accounts are about having many more options. You might prefer investing all or part of your funds in assets with more growth potential, such as private placement in another business or even venture capital. You really do have countless investment options that can include crowdfunding, cryptocurrencies. or other creative alternatives!
Self-Employed And In Control
When you are in full control, your preference could include tax diversification with a Roth Solo 401k account. Deferring tax on income is reason enough to consider a Solo 401k. But what difference would it make to you if the earnings on your Roth Solo 401 account were tax-free? This isn’t for every soon-to-retire entrepreneur, but it will make sense to some. A Roth Solo 401k means you elect to pay taxes currently on both your salary deferral and your catch-up contribution. You don’t have to go 100% Roth, you can do a combination of Roth and traditional Solo 401k. What you get in exchange for paying the taxes upfront on your contributions is that all the earnings are tax-free — forever. You never pay taxes on the earnings (or contributions) the entire time they are growing in your retirement account nor when you decide to begin withdrawing them from the Roth Solo 401k account. This works well even when you are near retirement if you think the income tax rates will increase because you’ll have already paid the income tax on the contributions at a lower rate. And on the earnings, tax-free is… well, it’s tax-free. You never pay taxes on the earnings, which can be a bonanza during retirement when you might bump up into a higher tax bracket because of all the retirement wealth that you have accumulated. Additionally, Roth Solo 401k accounts are not subject to required minimum distribution (RMD) rules. You can pass any excess wealth to your heirs rather than being forced to take distributions. Finally, your Nabers Group Solo 401k automatically comes with a Roth Solo subaccount.
But there is more than just tax strategy at play with the Solo 401k. You’re diversifying retirement dollars away from your business which can be a smart move in a shaky economy. And because the Solo 401k is governed by the Employee Retirement Income Security Act of 1974 (ERISA), plan assets are generally better protected from creditors compared to IRA and SEP accounts.
Retire Wealthy With a Solo 401k
People are living longer. Many of us are likely to live beyond 100. Many of us don’t want to retire at 65 or even at 70 (90 is the new 70). Entrepreneurs certainly don’t fit a one-size mold. But it’s safe to say that most (or all) of us want to have a happy and healthy retirement. That might mean some medical expenses that typically aren’t insured, such as massage therapy, acupuncture, chiropractic, and other nontraditional treatments. Hopefully, with good health, you are confident that your later years will allow you to continue living the life you want, traveling and having fun. It all takes retirement money. Continuing to work part-time at an enjoyable self-employed business can be the key to making it all come true. That is where a Solo 401k and all the benefits continue to support your dreams.
When you do exit the everyday work grind, what do you want that will be yours and only yours? Do you want to travel without money worries? How about contributing time and money to your favorite social causes? Do you want to spend time with your family and care for them? Or maybe just get up each day to do something enjoyable? There are as many dreams as there are individuals. Unfortunately, few dreams come true without financial security.
Having it all takes some determination along with action on your part. The basics begin with long-term thinking by opening a tax-advantaged retirement account early. This allows you to grow wealth faster through compound earnings. But life throws a lot of curves and bumps at us.
Personal retirement finances are the #1 reason baby boomers give for working longer. At least two-thirds of older Americans say they haven’t completely recovered from the last recession (Great Recession). Just as important, more than 50% say they haven’t been able to save as much as they did before that meltdown. A mere 17% have been able to put away a bigger chunk of their paycheck. Many baby boomers have long wanted to start their own businesses. Doing it near your retirement age could be the best option for you. A Solo 401k account can be the low-risk retirement investment vehicle you’ve been looking for.
You’ve already read about the many special Solo 401k benefits to consider. If this is the answer for you, there are many businesses you can start with little to no time or capital cost. Once you have the business up and running, you can invest in any number of assets. Read a case study here about a retirement-age couple who invested in low-risk real estate with secure and tangible assets.
Self-Employed Tax Benefits
If you already own a small business, your Solo 401k contributions remain tax deductible until you retire from self-employment. You also gain many other tax benefits by being self-employed.
Unfortunately, the retirement news doesn’t get any better. Statistics show that baby boomers hold the second highest debt load among the generations. Only the Gen Xers carry more. Most boomers had plans to enter retirement debt free. The reality is baby boomers are now carrying more debt than ever before. The sliver of good news is that many are close to paying off mortgages, which is the primary cause of debt. But again, it means working until those mortgages are paid. Another reason baby boomers choose not to retire is the older spouse doesn’t want to retire until the younger one reaches an age he or she can retire. Or one spouse keeps working because he or she isn’t ready to spend 24/7/365 with the other. Regardless, it keeps baby boomers working in retirement. It might not even be a good idea to go from full engagement to watching daytime TV – if you don’t have the dollars to golf.
Starting your own business is a good option. If you do start or have your own small business, even part-time or on the side, the Solo 401k account may be the right answer for many baby boomers. It can keep you active at the level you prefer. You determine the amount of financial security and risk you want. Solo 401k earnings continue to be tax-deferred and/or tax-free while growing your ultimate nest egg at the same time.
Setting Up Your Self-Employed Retirement Plan
Setting up a Solo 401k retirement plan is easy and allows for tax-deductible contributions much larger than an IRA or employer 401k.
Start where you are. Use what you have. Invest in what you want. We help get your retirement funds into your control — where they belong!