Self-employment is fast gaining popularity in the U.S.A. As per the statistics provided by the Bureau of Labor Statistics, in September 2022, over 16.5 million people in the United States registered themselves as self-employed. It is over 10 percent of the entire working population in the country. According to Forbes, if you are a solo entrepreneur or owner of a small business, it implies that you are very much on your own in terms of retirement savings. However, it does not imply that you are not eligible for some of the advantages available to individuals having employer-sponsored plans for retirement.
a. Problem: If you are a solo entrepreneur or owner of a small business thinking of investing in an alternative savings option for retirement, you may consider a Solo 401(k). It is essentially a retirement savings account that lets self-employed people contribute as an employer and also as an employee. It, therefore, boosts the overall savings potential. As a small business owner, you may consider opening a Solo 401 (k) account to assist you in building sufficient savings to lead a comfortable retirement life. Some of the fabulous advantages of having a Solo 401(k) account include a Roth component; higher contribution limits of as much as 58,000 USD annually, Solo 401(k) loans, and limitless investment options. The solo 401 (k) plan is best for • Rolling over your already existing 401 (k) plans or IRA funds tax-free into an all-new solo 401 (k) plan • Using those funds for making tax-deferred investments like real estate • Borrowing up to $50,000 and making annual plan contributions with $60,000 as the upper limit
b. Solution: 1. Change 58,000 USD to $63,000 2. Change 60,000 to $70,000
The solo 401 (k) plan is best for
- Rolling over your already existing 401 (k) plans or IRA funds tax-free into an all-new solo 401 (k) plan
- Using those funds for making tax-deferred investments like real estate
- Borrowing up to $50,000 and making annual plan contributions with $60,000 as the upper limit
Solo 401(k): The Unbelievable Advantages
Some of the major advantages of a Solo 401 (k) retirement plan that attracts numerous small business owners or solo entrepreneurs are the following:
Promises Simple Administration
A solo 401(k) plan involves no need for any annual tax filing for all plans less than 250,000 USD in plan assets. Moreover, if your retirement plan has over 250,000 USD, you need to file a simple IRS Form 5500-EZ.
Opportunity to Borrow As Much As 50,000 USD Tax-Free
You enjoy the golden opportunity of borrowing as much as, $50,000 or 50 percent of your total accounts value (whatever is less). You may use the loan for whatever reason or purpose you like. In this context, you should realize that traditional IRA holders do not have the freedom to borrow any money from IRA. If they do, they will initiate a prohibited transaction.
Free to Purchase Real Estate Property with Leverage Tax-Free
You can consider making a real estate investment by utilizing non-recourse funds with your Solo 401 (k) retirement plan. You are not liable to pay any tax such as UBTI or Unrelated Business Taxable Income and Unrelated Debt Financed Income. You may visit solo401k for more detailed information.
Allows Higher Contribution Limits
A participant of the Solo 401(k) retirement plan has the freedom to contribute up to $22,500 in 2023. This has gone up from the $20,500 contribution limit in 2022. You have the liberty to contribute as much as 100 percent of the income earned.
- Employer Contribution – $43,500
- Employee Deferral – $22,500
- Catch-up Contribution – $7,500
- Total Contribution Limit – $66,000 or up to $73,500 in case of individuals aged 50 and above.
We have discussed a few advantages of opening a Solo 401 (k) retirement account. However, the most enticing feature of this alternative retirement plan for solo entrepreneurs and small business owners is that it offers limitless investment options. You are free to invest in whatever type of investment you like. You may consider investing in structured settlements, real estate, mortgage notes, precious metals, private equity, and tax liens. You may focus on diversifying your investment.