Solo 401(k) – Retirement Plans for the Self-Employed

Investing
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By Dmitriy Fomichenko

Learn more about Dmitriy on NerdWallet’s Ask an Advisor

When you hear the term “401(k) account,” you might immediately think of an employer-sponsored plan. But what about small businesses and independent contractors? Are they being left out of this aspect of the retirement planning process?

The IRS actually has a specific retirement plan dedicated to this group of folks, called a Solo 401(k). This retirement plan, however, is not as widely known as other qualified plans are. Let’s take a look at the basic points of a Solo 401(k) plan.

Who can get a Solo 401(k)?

Solo 401(k) is designed for self-employed small business owners and independent contractors. This is often misunderstood, as people often think that being “self-employed” means a full-time gig. It does not have to be so. If you work full-time for a company, but at the same time have your own business or freelancing gigs on the side, you will be able to qualify.

Solo 401(k) is designed for small businesses, however. Therefore, to qualify, the business or self-employed activity cannot have any other full-time employee except for the owner and his or her spouse.

Go beyond stocks and bonds

While many of us don’t follow the stock market closely, each of us can be an expert in our own fields. A real estate agent, for example, knows the in and outs of real estate investment and would excel in this market. Therefore, it just doesn’t make sense to force everyone to invest their retirement funds in stocks and bonds, does it?

A Solo 401(k) offers this flexibility when it comes to investment options. Unlike traditional qualified plans, investors can choose to invest their savings in almost any asset available, including real estate, private businesses and precious metals.

Take control of your retirement future

All 401(k) accounts require a designated trustee, who manages the investment assets of the account. The difference with a Solo 401(k) is that you can be the trustee of your own account. This way, you, as the account owner, will be able to take control of your savings and direct investments as you like. In the example of the real estate agent above, besides the ability to invest in real estate, the agent can also uses his or her own expertise to grow the funds.

High contribution limit

Owners of a Solo 401(k) can contribute as much as $17,500 annually in salary deferral, just as with a regular 401(k). At the age of 50 or older, account holders can also make a catch-up contribution of $5,500, bringing the total salary deferral to a maximum of $23,000.

But what about employer matching, since there is no employer in the picture? In the case of Solo 401(k), the employer is actually you. That means you can contribute a profit sharing portion, which can bring the total annual contribution to as much as $52,000 in 2014. With this high contribution limit, you can now take full advantage of the tax benefits for retirement plans and grow your nest egg faster.

With these benefits, a Solo 401(k) is certainly attractive to many investors. To find out if you’re eligible and if it’s the right solution for you, talk to your financial advisor.