Today, I want to share an informative article from Paul Kim of Carry Money about the benefits of having a solo 401k, how much you can contribute each year, and how a solo 401k works. Many of my readers are self-employed, so this is a perfect topic to cover since saving for retirement is crucial!
A solo 401k is a powerful wealth-building tool for self-employed individuals. It offers the highest contribution limits of any retirement plan, tax-free compounding, and the ability to invest in any asset class.
I’ve been self-employed for most of my professional life, about nine years. In my early 20s, I discovered the potential of making money online, taught myself how to build blogs, learned SEO, and have been growing content businesses ever since. Recently, I joined the team at Carry Money as a full-time employee. Many people asked why I would switch from working for myself to becoming an employee.
I have two reasons:
1. The founder of Carry Money, Ankur Nagpal, previously built Teachable into a $250 million business. Working with him and his talented team is an incredible opportunity. After nearly a decade of solopreneurship, I wanted to be part of a group working towards a larger goal.
2. Carry Money is developing an intuitive solo 401k plan for self-employed people, something I’ve wanted for a long time.
Before joining Carry Money, I had heard of a solo 401k but dismissed it due to its complexity and cost. Major banks offered basic versions without good features, and other providers didn’t seem trustworthy for retirement savings. At Carry Money, we launched a self-directed solo 401k plan with checkbook control, reimagining the signup flow and user experience to make it intuitive and accessible.
If you’re a business owner or self-employed (running a blog, freelancing, or creating content), here are some reasons to consider a solo 401k. Even if you’re not focused on retirement savings now, the tax benefits can save you tens of thousands of dollars each year.
What is a solo 401k?
A solo 401k is a special 401k plan for business owners and self-employed individuals. It offers the highest contribution limits, a Roth account option, and the ability to invest in any asset class with tax-free compounding. Unlike a regular 401k, you don’t need an employer to sponsor the plan. As a business owner or self-employed individual, you can set up the account and start contributing on your own.
How do you qualify for a solo 401k?
To qualify, you need:
1. Any sort of business activity.
2. No full-time W-2 employees working over 1,000 hours per year in your business (excluding your spouse).
There are no income limits, and any type of business entity qualifies. However, you cannot have any full-time employees other than your spouse.
What’s special about a solo 401k?
A solo 401k offers more control and flexibility than any other retirement plan. Here are some key benefits:
1. Highest Contribution Limits
For 2022, you can contribute up to $61,000, or $67,500 if you’re at least 50 years old. For 2023, the limits are $66,000 and $73,500, respectively. In comparison, a regular 401k has a limit of $20,500 for 2022 and $22,500 for 2023, and a traditional or Roth IRA has a limit of $6,000 for 2022 and $6,500 for 2023.
2. Invest in Any Asset Class
Unlike employer-sponsored 401ks limited to mutual funds, a solo 401k allows investments in any asset class, including cryptocurrencies, NFTs, real estate, precious metals, and private equity.
3. Tax-Free Compounding
A solo 401k offers tax-free compounding, meaning profits from asset sales go back into your account tax-free. This applies to investments like real estate, where rental income and profits from sales are reinvested tax-free.
4. Roth Option
Many solo 401k plans offer both traditional (pre-tax) and Roth (post-tax) accounts. Traditional accounts provide tax deductions for contributions, while Roth accounts offer tax-free withdrawals in retirement.
5. Mega Backdoor Roth
This feature allows you to contribute more to a Roth solo 401k than typically allowed. For 2023, you can contribute up to $66,000 ($73,500 if 50+) into your Roth solo 401k.
6. Largest Possible Tax Deduction
You can decide how to allocate contributions each year. If you contribute everything to a traditional solo 401k, you can get a tax deduction of up to $66,000 ($73,500 if 50+) for 2023.
7. Rollovers
You can roll over assets from other retirement accounts into a solo 401k, except from a Roth IRA. This gives you access to more investment options without affecting your annual contribution limits.
Solo 401k Contributions Explained
You can make contributions as both the employer and employee. Employee contributions can be up to 100% of compensation, up to $22,500 for 2023 ($30,000 if 50+). Employer contributions can be up to 25% of compensation if incorporated, or 20% if not. The total contributions must not exceed $66,000 for 2023 ($73,500 if 50+). Employee contributions can be pre-tax or Roth, while employer contributions are pre-tax only.
How do withdrawals work with a solo 401k?
You can start making withdrawals at age 59½ without penalties. Early withdrawals incur a 10% penalty plus income taxes. Traditional solo 401k withdrawals are taxed as regular income, while Roth solo 401k withdrawals are tax-free.
Solo 401k vs. Other Retirement Plans
Compared to SEP IRAs, solo 401ks offer a Roth option, catch-up contributions, and more investment choices. Solo 401ks don’t allow full-time employees but don’t require equal percentage contributions for employees like SEP IRAs.
Compared to employer-sponsored 401ks, solo 401ks offer higher contribution limits, more investment options, and the ability to roll over funds into other retirement accounts.
Compared to IRAs, solo 401ks have significantly higher contribution limits and allow investments in alternative assets. IRAs have income limits that restrict contributions or tax deductions if your income is too high.
How does checkbook control work?
Checkbook control means you have direct control over your solo 401k’s bank and investment accounts. You can write checks and wire funds directly for investments. At Carry Money, we provide integrated brokerage accounts, making it easy to fund accounts and make investments.
Conclusion
A solo 401k is a powerful tool for business owners and self-employed individuals, offering high contribution limits, tax-free compounding, and investment flexibility. To qualify, you need any business or self-employment activity and no full-time W-2 employees working over 1,000 hours per year. At Carry Money, we’ve simplified the signup process, making it quick and easy to set up a solo 401k.
If you’re interested in learning more about setting up a solo 401k, feel free to reach out with any questions.