What You Can Do with a Solo 401k

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Financial security doesn’t come easy for most of us. Nowadays, it simply isn’t enough to have an income which can sustain you from day to day; you also have to plan ahead in order to prepare for your future.

 

If you are a full-time employee working in a company, chances are you already have this covered with your pension or some kind of retirement plan sponsored by the company. Both the employee and the company contribute in such plans. But what if you are your own boss and also your own employee? Is there a way in which you can participate in a similar plan where you can set aside for your retirement?

 

Unless you’re someone who has a lot of money, setting aside a bit today definitely won’t be enough for your retirement. Coupled with the fact that you don’t have a boss employer that will match your contributions, you’ll have to find a way to make your money grow significantly while sheltering it from risks and deductions.

 

What is a Solo 401k?

 

The Solo 401k is a kind of retirement plan designed for self-employed individuals who do not have any full-time employees. If you are an individual practitioner, an independent contractor, an artist, a sole proprietor or a one man corporation then this is the right plan for you.

 

Why do you need a Solo 401k?

 

Basically, like any retirement plan, a Solo 401k compels you to set aside a portion of your income in an account. However, instead of letting this money become inactive, you can make it grow by investing it in stocks, bonds, mutual funds, real estate, tax liens and private loans to mention a few. This can be a far more efficient way to earn; in a way it uses smaller capital and man power compared to putting up a new business and the returns are significantly greater compared to bank interest.

 

Another reason, possibly the most popular one, is that a Solo 401k allows you to make tax-deductable contributions. This means that you can set aside money for your retirement fund even before your income gets taxed, thus lowering your taxable income. You can even contribute up to $54,500 a year and even more if your spouse works for you.

 

You can, however, expect to get taxed once you make withdrawals after your retirement. Depending on your current financial situation, you can also opt to make contributions after your income has been taxed so that any withdrawals after your retirement will be tax-free. This is known as a Roth contribution.

 

A very attractive feature of the Solo 401k is that it allows you to make loans of up to $50,000. This can be very handy especially if you need to pay for a new house, pay for medical bills or put up capital for a new business.

 

The Solo 401k can also be funded by means of a rollover. A rollover is where you use funds from an existing retirement plan into your Solo 401k. You can roll-over a Traditional IRA, Corporate 401k, SEP IRA, 403b and Keogh into a Solo 401k.