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While there are a lot of perks to being self-employed, one downside is that you no longer have the option to contribute to a group 401k plan. If you are the owner and sole employee in your business, a solo 401k plan can offer many similar benefits.

Our solo 401k calculator can help you determine how much to contribute and what your balance will be at retirement. For more details like yearly contribution limits and who can open this type of plan, read through our FAQ section below.

If you’d like to learn about the other savings programs available to the self-employed, head over to this page.


What is a solo 401k plan?

An solo 401k plan is a retirement savings program for small business owners that don’t have any employees.

There’s one exception: Even though it’s called a solo 401k, you can setup the program for your spouse if they work for the business as well.

It’s designed for self-employed workers to gain the features of an employer-sponsored plan, without working under someone else. The business owner and the economy both end up winning.

Who should participate in a solo 401k?

An individual 401k is a great option for small business owners and their spouses.

Typically, it makes the most sense for sole proprietors, and owners of an S corporation if they don’t have any employees. If you intend to hire any employees in the future, this type of plan might not be right for you.

How does a solo 401k work?

Solo 401k plans are very similar to their corporate counterparts and fall under the same rules and requirements.

However, solo 401k plan holders have a unique opportunity, as they are both the employer and employee. As such, they can have two contributions to their plan: elective and non-elective.

Elective Deposits

Elective deposits are the regular contributions that you decide to make from your earned income, up to 100% of your compensation.

The yearly limit for elective deposits in 2019 is $19,000, which is up $500 from 2018. For plan holders that are 50 years and older, there’s an additional $6,000 allowance, permitting a contribution total of $25,000.

You can make traditional pre-tax deposits to reduce your taxable income during your peak working years. Or, if you think your future holds a higher tax bracket, you could pay the tax upfront on Roth deposits and get tax-free earnings in retirement.

Non-Elective Deposits

Non-elective deposits are the contributions towards your retirement savings by the business owner.

In a corporate 401k, non-elective deposits are the employer’s matching contribution (or, profit-sharing). In a solo 401k, you can dictate the level of matching contributions, up to 25% of your compensation.

The yearly limit for non-elective deposits in 2018 cannot exceed $55,000, up $1000 from 2017.

Reporting To The IRS

When your plan reaches $250,000 in value, you’ll have to file an annual report using Form 5500-SF.

Plan Withdrawals

If you try to draw upon your earnings before the age of 59½, or before the account is aged 5 years, you’ll trigger a 10% penalty tax on your earnings. If you grew your savings with traditional deposits, you’ll also owe income taxes on each distribution.

Keep in mind, these limits apply to each person and not each plan. If you have another job with a 401k account you’ll have to make sure your combined deposits (elective & non-elective) don’t exceed the IRS guidelines. The IRS changes the contribution limits to offset inflation, so check back often.

How can I open a solo 401k?

It’s not too difficult to open a solo 401k plan if you have your EIN (employer identification number) handy. You’ll have to contact a brokerage such as Charles Schwab or Merill Edge, for example.

Their team will guide you through the process, which usually consists of an adoption agreement and an account application. It’s important to do your research on plan custodians ahead of time, as you’ll gain access to the investments offered by the brokerage.

Typically, you’ll get a mix of stocks, bonds, mutual funds, ETFs, and index funds to choose from. Always pay attention to your investment fees.

If you want to make a deposit this year, the plan has to be active and an elective deposit has to be made by December 31st. Your non-elective contribution can wait, it just has to be completed by the time you file taxes.

Hopefully, you now have a better a idea of how much to contribute to have a happy retirement. Run some numbers through our calculator to get a feel for what you can accomplish. If you aren’t sure about how much to be saving, try our Retirement Planning Calculator.

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