There are many different retirement accounts made for individuals and business owners. The solo IRA, the traditional 401(k), and the solo 401(k) have their own benefits and setbacks. While there are some similarities to how they function, it is crucial to understand what option is best for an entrepreneur before making any final decisions.
What Is A 401(k) Used For?
A traditional 401(k) account refers to a contribution-style retirement account that professionals can typically take advantage of through their employer. Employees who elect for a 401(k) through their workplace will have a portion of each paycheck go straight to the retirement account. In some instances, employers may also provide some sort of matching contributions to help continue building the retirement account.
What Is A Solo 401(k)?
In its most basic terms, a solo 401(k) refers to a retirement account that can be used for those who do not have any employees. They typically employ themselves, which is what makes the solo 401(k) so appealing. When determining if an entrepreneur without any employees should consider a solo 401(k), it is important to examine a few factors beforehand. The first step is to understand the main differences so that one’s retirement income receives the greatest savings.
Designed to be Simpler
The solo 401(k) is designed to be the simpler option for the self-employed entrepreneur who has no employees and fewer financial responsibilities. No taxes are paid until retirement age, and the rules regarding the Employee Retirement Income Security Act (ERISA) for employers and employees do not apply. The solo 401(k) is simpler and adds more features, like after-tax contributions, compared to a Simplified Employee Pension Individual Retirement Arrangement (SEP-IRA).
The Same Benefits
This account has the same benefits as a traditional 401(k) that allows him or her to contribute a tax-deductible income. In the end, the account holder has increased savings and reduced tax bills. However, there is a 10% fee for withdrawing funds before the age of 59.5, and the regulations are not as lenient for borrowing money.
Higher Contribution Limit
A traditional 401(k) limits the amount of a contribution to $19,500. A solo account owner is an employer and an employee, so it is possible to double the contribution to $58,000 up to $64,500 per year. The account holder can make two contributions, with one being limited to $19,500 and the other being limited to 25% of that amount. Furthermore, the spouse can make contributions to the savings.
Some people can contribute money to a regular 401(k) if they’re working at a company and invest in a solo 401(k) if self-employed. This option allows entrepreneurs to increase their annual retirement funding and spending limits.
The solo 401(k) is a lesser-known option that is the recommended solution for the self-employed. But solo entrepreneurs need to know the differences between the various types of IRA and 401(k) accounts before they make assumptions about which is better. They need to learn exactly how the solo 401(k) is ideal for saving for retirement and reducing income taxes. While it may be a difficult decision to make on what type of 401(k) to pursue, it is recommended to begin a retirement account as soon as possible. Beginning a retirement account early in one’s career can not only help build a savings account that will set them up for retirement, but it can also ensure that the person will be taken care of in the future.
To learn more about pursuing a solo 401(k), visit Chad Kagen’s website at chadkagen.net.