How to Pay Less Taxes This Year With a Solo 401(K)

Investing
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By Dmitriy Fomichenko

Learn more about Dmitriy on NerdWallet’s Ask an Advisor

For self-employed business owners, the end of the year is the time to review the year’s earnings and expenses. Fortunately, if you are a self-employed contractor or small business owner with no full-time employees, you qualify for a Solo 401(k) plan. This retirement plan offers many benefits, including tax-saving features. Let’s take a look at how to pay less taxes this year with a Solo 401(k).

First, account holders need to know that the contribution deadline for a Solo 401(k) is not at the end of the year, as many assume. In fact, a Solo 401(k) only has to be set up before the end of the year in order to receive contributions for that year. Contributions can be made up to the tax-filing deadline of the following year.

The high contribution limit of a Solo 401(k) is the key to paying less taxes for self-employed business owners. Plan participants can put away a maximum contribution of $57,500 in 2014. This is about 10 times as much as is allowed in a traditional IRA. This contribution limit includes salary deferral contribution, profit sharing contribution and a catch-up contribution for plan participants over 50 years old.

The high contribution limit allows plan holders to shelter more income in their tax-deferred account. The more you contribute into your Solo 401(k) account, the more taxes you can save this year.

Still wondering how to pay less taxes in the long term? Some people prefer paying taxes upfront in order to save in the long run. For those people, a Roth Solo 401(k) is the right way to go. A Roth account allows plan participants to contribute after-tax amounts, so all taxes are paid upfront. The contributed amount, however, is allowed to grow tax-free after that. All gains, together with the original contribution, will not be taxed again upon withdrawal.

So if you are asking yourself how to pay less taxes this year, consider a Solo 401(k) plan. Besides the tax-deferred or tax-free benefits, a Solo 401(k) plan offers many other advantages over traditional retirement plans. Account holders can retain total control over their retirement funds instead of relying on a custodian. Plus, the account is allowed to invest in almost any investment assets, including stocks, bonds, mutual funds, real estate, private businesses, hard money lending, precious metal and much more.

If you are a self-employed business owner with no other full-time employee, remember you have until Dec. 31 to set up a Solo 401(k) plan. Take action today to start saving toward your retirement and pay less taxes this year.