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You can still have a company retirement plan, even if you’re a company of one.
It’s true. Such plans aren’t just for workers at large corporations with generous benefits packages. If you run an owner-only business, you are eligible for a qualified retirement plan called a Solo 401(k), which also provides tax benefits.
But many entrepreneurs put their own retirement planning on the back burner. It could be the 15-hour days spent building a company. They also may be hesitating because of some common myths about retirement planning for small-business owners.
Let’s explode five of those myths now, so you can get started planning.
Myth No. 1: My business is too small for a retirement plan
If you’re running an owner-only business, you’re not required by law to have a qualified retirement plan. But a Solo 401(k) is a great way to start securing a better financial future. It also offers significant tax savings.
According to the IRS, this self-directed retirement product, sometimes called a One-Participant 401(k) plan, “is a traditional 401(k) plan covering a business owner with no employees, or that person and his or her spouse.”
All contributions and investment gains within the plan are tax-deferred (or tax-free if you choose a Roth account). In addition, the cost of setting up the retirement plan can qualify as a tax-deductible business expense.
To qualify, an owner doesn’t even have to work full time in the business. By showing self-employed business activity, he or she will qualify. With this low-cost, individualized 401(k) product, there is really no business too small for a retirement plan.
Myth No. 2: All retirement plans have to invest in stocks and bonds
As an entrepreneur, investing in a plain-vanilla target date fund might seem like an uninspiring option. You may prefer to invest in sectors you’re interested in — such as technology, energy or financial services.
A self-directed Solo 401(k) gives you a wide range of investment options, including real estate, private businesses and precious metals. You can take the driver’s seat and direct your investments without the involvement or costs associated with third-party custodians.
Myth No. 3: I can’t meet the minimum requirement
With a Solo 401(k), the contributed amount for each year is totally at the discretion of the plan owner. You can put in as little as you like or even suspend contributions during a challenging year for your business.
What about contributions during a good year? This retirement savings plan can accommodate higher contributions than most retirement plans. In 2015, a Solo 401(k) participant can contribute up to $53,000 annually. Those older than 50 can put in an additional $6,000 as a catch-up contribution. So a Solo 401(k) can serve as a great tax-sheltering strategy for you personally, as well as for your business.
Myth No. 4: Retirement plans are too expensive
It is good to be concerned about the costs and fees of a retirement plan. Too many traditional plans come with hidden expenses.
Switching to a self-directed retirement plan is a great way to save on management and custodian fees. Since you, the plan owner, can act as both the plan trustee and plan administrator, there are no transaction or asset-based fees. A Solo 401(k) eliminates the role of custodian altogether.
Myth No. 5: All retirement plan providers are the same
All retirement plans are regulated by the IRS, but specific features of a plan can be restricted by the plan provider. Choosing the right provider can be crucial, especially for business owners who would like to take advantage of a self-directed option.
With a Solo 401(k), there are three types of plan providers. First are traditional banks and brokerage firms. Although the IRS allows a Solo 401(k) to invest in almost any asset, these institutions often restrict the investment products they offer.
The second category includes self-directed custodians and trust companies. You’ll have the option of investing your retirement fund into alternative assets, but your custodian will remain between you and your retirement account. This means you’ll have to pay various fees, such as a holding fee or a fee per asset. You’ll also need the custodian’s approval before adding any investment to your plan.
The last type of Solo 401(k) provider is the one with a truly self-directed option. Unlike the first two, these plan providers do not sell any investment products and give you total control over your investments. There is no restriction on investment choices, no approval needed and no transaction or holding fees.
The bottom line: Investment returns grow exponentially—small contributions now can make a big difference down the road. Don’t let these retirement planning myths stand between you and your future. Get started on a retirement plan today.
To learn more about Solo 401(K) plans, check out NerdWallet’s Ask an Advisor.