What Is a Solo 401(k)? Self-Employed Retirement – NerdWallet

The perks of self-employment are batch, but there ’ sulfur at least one significant drawback : the lack of an employer-sponsored retirement design like a 401 ( kilobyte ). Enter the solo 401 ( potassium ), or what the IRS calls a one-participant 401 ( thousand ). Designed for freelance workers, a solo 401 ( kilobyte ) mimics many of the features of an employer-sponsored plan, without the drag of working for the man.

What is a solo 401(k) plan?

A solo 401 ( kelvin ) is an individual 401 ( kilobyte ) designed for a business owner with no employees. In fact, IRS rules say you can ’ t put up to a solo 401 ( k ) if you have full-time employees, though you can use the design to cover both you and your spouse.

Quick facts and who qualifies for a solo 401(k)

fair want the need-to-know basics about this retirement report ? here ’ s the breakdown :

eligibility rules No long time or income restrictions, but must be a business owner with no employees .
Contribution terminus ad quem full of up to $ 58,000 in 2021 and $ 61,000 in 2022, with an extra $ 6,500 catch-up contribution if 50 or older .
Taxes on contributions traditional 401 ( k ) : Contributions are made pre-tax, reducing taxable income for the year. Roth 401 ( k ) : Contributions are made with after-tax dollars .
Taxes on qualified distributions in retirement traditional 401 ( kilobyte ) : Qualified distributions are taxed as income. Roth 401 ( kilobyte ) : Qualified distributions are tax-exempt .
How to open vitamin a long as you have an employer identification phone number, you can open a alone 401 ( kilobyte ) at many on-line brokers — any of the ones on our list of best brokers for IRAs would besides be a good fit for a 401 ( potassium ) .

» ready to open a solo 401 ( kilobyte ) ? Check out our list of best brokers for IRAs. For more detailed information, learn on.

Solo 401(k) contribution limits

The total solo 401 ( k ) contribution limit is up to $ 58,000 in 2021 and $ 61,000 in 2022. There is a catch-up contribution of an extra $ 6,500 for those 50 or older. To understand solo 401 ( kilobyte ) contribution rules, you want to think of yourself as two people : an employer ( of yourself ) and an employee ( yes, besides of yourself ). Within that overall $ 58,000 contribution restrict in 2021 and $ 61,000 in 2022, your contributions are subject to extra limits in each character :

  • As the employee, you can contribute up to $ 19,500 in 2021 and $ 20,500 in 2022, or 100 % of compensation, whichever is less. Those 50 or older draw to contribute an extra $ 6,500 here .
  • As the employer, you can make an extra profit-sharing contribution of up to 25 % of your compensation or net self-employment income, which is your net income profit less half your self-employment tax and the plan contributions you made for yourself. The terminus ad quem on compensation that can be used to factor your contribution is $ 290,000 in 2021 and $ 305,000 in 2022 .

Keep in mind that if you ’ re side-gigging, employee 401 ( k ) limits apply by person, rather than by plan. That means if you ’ re besides participating in a 401 ( thousand ) at your sidereal day occupation, the limit applies to contributions across all plans, not each individual plan.

Is Solo 401(k) tax deductible? Solo 401(k) tax advantages

The dainty thing about a solo 401 ( kelvin ) is you get to pick your tax advantage : You can opt for the traditional 401 ( k ), under which contributions reduce your income in the year they are made. In that event, distributions in retirement will be taxed as ordinary income. The option is the Roth solo 401 ( kilobyte ), which offers no initial tax break but allows you to take distributions in retirement tax-exempt. In general, a Roth is a better choice if you expect your income to be higher in retirement. If you think your income will go down in retirement, choose for the tax bankrupt today with a traditional 401 ( kilobyte ). Because of these tax perks, the IRS has pretty nonindulgent rules about when you can tap the money you put into either type of account : With few exceptions, you ’ ll give taxes and penalties on any distributions before historic period 59 ½. » Want more information ? here ’ randomness our in-depth comparison of Roth and traditional 401 ( kelvin ) mho

Covering your spouse under your solo 401(k)

The IRS allows one exception to the no-employees rule on the alone 401 ( kilobyte ) : your spouse, if he or she earns income from your business. That could efficaciously double the amount you can contribute as a class, depending on your income. Your spouse would make elective deferrals as your employee, up to the $ 19,500 employee contribution limit ( plus the 50-and-older catch-up provision, if applicable ). As the employer, you can then make the design ’ s profit-sharing contribution for your spouse, of up to 25 % of compensation.

How to open a solo 401(k)

You can open a solo 401 ( thousand ) at most on-line brokers, though you ’ ll need an Employer Identification Number. The agent will provide a plan adoption agreement for you to complete, vitamin a well as an explanation application. Once you ’ ve done that, you can set up contributions. You ’ ll have entree to many of the investments offered by your agent, including common funds, index funds, exchange-traded funds, individual stocks and bonds. If you want to make a contribution for this class, you must establish the plan by Dec. 31 and make your employee contribution by the goal of the calendar year. You can typically make employer profit-sharing contributions until your tax-filing deadline for the tax class. note that once the design gets rocking, it may require some extra paperwork — the IRS requires an annual report on Form 5500-SF if your 401 ( thousand ) plan has $ 250,000 or more in assets at the end of a given class. If you need help managing the funds in your alone 401 ( K ), robo-advisor Blooom will manage your 401 ( kilobyte ) at your existing provider. If you want even more comprehensive fiscal avail, you might opt for an on-line design service. Companies such as Facet Wealth and Personal Capital offer low-cost access to homo advisors and provide holistic guidance on your finances, including how to invest your 401 ( kilobyte ). ad

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NerdWallet rating  NerdWallet ‘s ratings are determined by our editorial team. The scoring rule for on-line brokers and robo-advisors takes into report over 15 factors, including report fees and minimums, investment choices, customer support and mobile app capabilities .

NerdWallet rating  NerdWallet ‘s ratings are determined by our editorial team. The scoring formula for on-line brokers and robo-advisors takes into report over 15 factors, including account fees and minimums, investment choices, customer back and mobile app capabilities .

NerdWallet rating  NerdWallet ‘s ratings are determined by our editorial team. The scoring formula for on-line brokers and robo-advisors takes into account over 15 factors, including report fees and minimums, investment choices, customer support and mobile app capabilities .

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