Control Your Business And Your Retirement
If you own your own business then you probably enjoy the ability to make your own decisions and act independently. When it comes to retirement the same is probably true, but finding the right plan can be tedious and low on your list of priorities. The One-Participant 401(k), also known as the Solo 401(k), can give you the freedom and independence you desire. Solo 401(k) plans are designed specifically for employers with no full time employees other than the business owners and their spouses. For employers with W-2 employees, please see our blog on SEP IRAs.The Solo plan, much like its traditional 401(k) counterpart, allows you a tax advantaged retirement savings account. Unlike the traditional plan, Solos can be self directed, meaning you do not have to pick your investments from a limited list given to you by your plan administrator.
The Solo plan allows you to seize any investment opportunity, including real estate, and any expenses or income related to the investments will be paid or received through the plan. You can even deduct your contributions to your plan from the company’s federal taxable income. The Solo plan also provides an efficient means of sharing and saving the profits from your business with yourself.
Profit sharing contributions can be made up to 25% of your salary (20% for sole proprietorships or single member LLC’s). Salary deferral contributions can be made up to 100% of salary or $18,000, and after the age of 50, salary deferrals can be up to $24,000. Total combined contributions for fiscal year 2017 can be up to $54,000 or $60,000 if you are age 50 or older. A traditional IRA only allows a maximum contribution of $5,500 over the same time period. The staggering discrepancy in contribution limits makes it clear why the Solo 401(k) can be advantageous. Keep in mind, however, that if you are self employed and work another job with a 401(k) plan, contribution limits are per person, not per plan.
With such large contribution limits there could be a risk of over contributing, so if you underestimate the capital requirements for your business or personal life and need a loan to finance your activity, the Solo plan allows for this. You are able to draw a personal loan of up to $50,000 or 50% of your account balance if you meet certain requirements. The loan can be used in any manner you choose, from personal investments to business purchases. The flexibility provided from a self-directed Solo plan is perfect for individuals who have the time, and want to put in the effort to make the important decisions regarding their investment management.
For individuals who do not wish to spend their time on money management, but rather focus on their business efforts, Solo plans do not need to be self-directed. Just like the traditional 401(k), Solo plans can be managed by a plan advisor. For most people this is the preferred choice, as finding a healthy balance between running your business, personal life, 401(k) investment research and portfolio management becomes an unsustainable act. These advisor-based accounts have more limited investment options, however the options are already carefully vetted and selectively chosen by investment professionals.
If you are planning for retirement and own your own business, it is certainly worth considering opening a Solo 401(k) plan over the traditional Roth IRA plan. With higher contribution limits, more optionality in investments, and the liquidity from personal loans, the Solo 401(k) should be a strong candidate in your search for a retirement plan. As with all retirement products, it is best to consult with a fiduciary to understand all the nuances and determine which plan is best for you.