MBO Partners offers excellent guidance for self-employed professionals who are looking for retirement options.
Fortunately, there are a number of solutions available. The right one for you will depend on a number of factors including your personal goals and income level, which you can discuss with a financial advisor. In this series, we’ll explore the retirement options available to independent contractors and provide you with what you need to know for a financially secure future.
Solo 401(k): The Details
A One-Participant 401(k) plan, or solo 401(k), is a traditional 401(k) that covers a business owner with no employees, or that person and their spouse. A solo 401(k) has the same rules and requirements as any other 401(k) plan you’d see through an employer.
You must establish the plan by December 31 or fiscal year end in order to make a contribution for that year. Aide from contributions, a solo 401(k) requires minimal maintenance, however, once you have $250,000 in assets you will need to file annual paperwork. You can also opt for a Roth solo 401(k), which mimics a Roth IRA. Consider this option if your income and tax rate are lower now than you expect them to be in retirement.
As a self-employed professional you act both as an employee and an employer. This means your contribution limits for a solo 401(k) are higher because you can contribute as both parties. A solo 401(k) will allow you to save large sums that wouldn’t be possible with other retirement plans.
There is no minimum required annual contribution. Because contributions are optional, you can save a lot in years when your business is doing particularly well, and less when you may be going through leaner times.
The main disadvantage of a solo 401(k) is that no extra employees can participate; you are only eligible as a self-employed business owner and a spouse. Minimal administration costs may apply as well, depending which mutual fund company you work with.
As a business owner and employee, there are two contribution limits with a solo 401(k):
- Elective deferrals: As an employee, you can contribute up to 100% of self-employed earned income up to the annual contribution limit, which is $18000 for 2017. This limit increases by $6000 to a total of $24,000 if you are 50 or older.
- Employer non-elective contributions: As an employer, you can contribute up to 25% of compensation. However, your total contributions (not including catch-up contributions for those 50 or older) cannot exceed $54,000 for 2017.
When calculating earned income, keep in mind that this number is your net earnings from self-employment after deducting one-half of your self-employment tax and contributions for yourself.
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