Solo 401(k) Plans: Empowering Self-Employed Retirement Savings

A Solo 401(k) plan, also known as an individual 401(k) or self-employed 401(k), is a retirement savings option designed for self-employed individuals and small business owners without employees other than a spouse. It stands out for its high contribution limits, offering substantial saving opportunities.

Understanding Solo 401(k) Plans

Solo 401(k) plans combine features of a traditional 401(k) with an IRA, allowing two types of contributions:

• Employee Contributions: As the employee and employer, you can contribute up to $23,000 in 2024, or 100% of compensation, whichever is less. If you’re 50 or older, an additional catch-up contribution of $7,500 is allowed.
• Employer Contributions: As the employer, you can make a profit-sharing contribution of up to 25% of your compensation or net self-employment income.

The total contribution limit for a Solo 401(k) in 2024 is $69,000, or $76,500 for those 50 or older, with a compensation limit of $345,000.

Benefits of a Solo 401(k) Plan

• High Contribution Limits: Allows for contributions significantly higher than other retirement accounts.
• Tax Benefits: Offers tax-deferred growth with pre-tax contributions.
• Flexibility: Includes loan options and a choice between traditional and Roth contributions.

Eligibility Criteria

To be eligible for a Solo 401(k), you need self-employment income and no employees other than a working spouse. Hiring other employees may require their inclusion in the plan.

Setting Up a Solo 401(k)

Establishing a Solo 401(k) involves selecting a plan provider, obtaining an EIN if necessary, completing paperwork, and adhering to IRS rules, with contributions made by the tax deadline.

Maximizing Your Solo 401(k) Contributions: A Practical Illustration

Consider a freelance consultant earning $140,000 annually in 2024. They can contribute $23,000 as an employee, plus 25% of their compensation as an employer, maximizing their total contribution and illustrating the Solo 401(k)'s advantage for retirement savings.

Note: If you contribute to a 401(k) through other employment, the $23,000 employee limit applies across all plans.

ProjectionLab and Solo 401(k) Plans

ProjectionLab can help you explore the benefits of a Solo 401(k) in your financial planning. Through simulations, assess how maximizing contributions impacts your retirement savings and tax situation. Optimize your retirement strategy with ProjectionLab.