For self-employed individuals and their spouses seeking a distinctive approach to retirement planning, the solo 401(k) is a compelling choice. The solo 401(k) allows business owners to seamlessly navigate the roles of both employer and employee, offering a streamlined path to significant savings.
Solo 401(k)
The solo 401(k) is a traditional 401(k) for self-employed individuals with no employees and their spouses. Therefore, all 401(k) laws apply to the solo 401(k). However, because you act as both the employer and employee, you may contribute as both roles simultaneously, driving savings. Low and medium-income earners also can be eligible to receive the saver’s tax credit, incentivizing retirement savings.
Breaking down 2024 contributions, the employee deferral limit for 2024 is up to 100% of compensation, capped at $23,000 or $30,500 for those aged 50 and older, including catch-up contributions. On the employer side, the contribution can reach up to 25% of compensation, as determined by your plan, or calculated using IRS Publication 560 guidelines for self-employed individuals.
Total contributions cannot exceed $69,000 for 2024 or $76,500 with catch-ups. Spouses who earn compensation from the business may also contribute, increasing the total limit to $138,000 or $153,000 with catch-ups. These limits apply per person, not per 401(k) plan.
Roth Solo 401(k)
There is also a Roth solo 401(k) option, which allows after-tax contributions. The Roth also allows tax and penalty-free withdrawals made before and after age 59½.
Comfortable Small Business Retirement
For details on the solo 401(k), visit the IRS website. For tax information, consult your tax accountant. Should you wish to explore personalized strategies or have questions about optimizing your retirement plan, consider a free consultation with our experienced financial advisors at First State. Contact us today at 918-492-1361.
This overview is for informational purposes only and is not a recommendation. It should not be the sole deciding factor in making an investment. Investing is a risk and, as with all risks, a positive return is not guaranteed. Past performance does not indicate future results.