As a business owner, you think more about your business than you do yourself. Small business owners have recently been putting together 401(k) plans for themselves since 2001 when federal tax laws made it more flexible for their needs. These new plans include a solo 401(k) or a self employed 401(k). It is a retirement savings plan for small businesses who only need savings for the business owners, and their spouses if they are employed by the same business. These are great options for sole proprietors or independent contractors. Continue reading for more information on why you need a 401(k) as a small business owner.
Other variations of the solo 401(k) include the individual(k), solo k, and the one participant k. The name of the type of 401(k) account depends on what financial provider you use.
Not only sole proprietors are eligible for these solo 401(k) plans. Any small business can utilize these, including corporations, limited liability companies, and partnerships. If someone works for a company that they do not have ownership of and owns and operates their own small business on the side, they are able to have a solo 401(k) attached to the small business. That retirement savings account can be funded through revenue of the small business.
These plans only work if you have no other employees in your small business, other than your spouse. All employees must be treated the same. If you were to hire an employee, you would have to offer them the same retirement planning so be careful when choosing your options.
A positive about these types of accounts is the high contribution limits. Since you are the owner and the employee of your business, you have the ability to contribute a much higher amount than a typical retirement savings account. In the 2019 tax year, business owners were able to contribute $56,000 to their 401(k) plan. All of that contribution money now lowers their taxable income to receive a lower income tax burden. Once the business owner is 50 or older, they will be able to contribute $62,000 a year.
Some other benefits are involved with the solo 401(k), especially the ability to borrow from the solo 401(k). You may be able to borrow up to $10,000 (or 50% of the balance) or $50,000, whichever is greater. You may also be exempt from filing a 5500 unless your balance exceeds $250,000. There is also no nondiscrimination testing required. Since you are the only person covered under the plan, there is no one that could be discriminated against.
Talk to us about whether or not you are eligible for these types of retirement savings. You do not want to spend years of your life working on growing your business to not have any savings for your golden years. Contact us today at firstname.lastname@example.org or give us a call at 800-955-9081.