Instruc(k)tions #003: The Extreme Benefits of a Solo 401(k)
June 21, 2023
Read time: 3 minutes
Since 2020, there has been a remarkable surge in solo entrepreneurs that has transpired coinciding with the onset of the COVID-19 pandemic.
You know it already because some of them are your clients. Their resiliency and ingenuity in navigating those challenging times is unmatched. Scraping together a business using the tech tools available has allowed most to emerge the chaos with a budding practice.
There is one thing missing.
A Solo 401(k).
You may have heard the Solo 401(k) mentioned by different names including owner only 401(k), self-employed 401(k), individual 401(k), single 401(k), uni 401(k), etc. These are all the same exact plans whose goals are two-fold: lower the solo entrepreneur’s taxable income and create a vehicle for savings.
How does it work?
First, the solo entrepreneur can contribute up to $22,500 from their income as a 401(k) contribution. Should your client be over the age of 50, they are also eligible for an additional $7,500 catch-up contribution. Finally, the solo entrepreneur can make a profit-sharing contribution to drive the aggregate contribution up to $66,000 or $72,500 if over the age of 50.
There are several different sources of money which go into these numbers.
The contributions can be a combination of pre-tax, Roth, and or after-tax money. This is an advanced form of retirement income-tax planning as a client can build different buckets of money depending on their personal strategy. Additionally, everything can go in as pre-tax funds creating the largest possible tax deduction today.
What other benefits would the Solo 401(k) provide?
· A solo entrepreneur can access a loan from their account up to $50,000
· No plan testing exists like a traditional plan with non-owner employees
· If a spouse is on payroll, he/she can opt to participate in the plan
· Very inexpensive administrative fees
· Flexible investment options
How to set up?
The beauty of the Solo 401(k) is the simplicity of the set up and design. Most of the design options in the plan document are left to be as flexible and open as possible. This reduces the number of decisions a business owner needs to consider.
Our new clients can expect the on-boarding process to be completely online and last about 15 minutes.
The client must have an EIN (Employer Identification Number). At some point in the future, the client will need us to help them file Form 5500 with the Department of Labor. This Form can only be filed under an EIN.
Should the client already possess and EIN, be sitting at a computer, and have a credit card, the set up is a piece of cake.
The very last piece is for the Investment Professional to establish an account to hold and invest the assets. We provide the Advisor a copy of the Adoption Agreement to aid in the plan establishment. On-going the solo entrepreneur will make deposits directly into their new account.
Go For It!
For a small cost the business owner can achieve big tax savings. The business owners have a right to know about this benefit and we need to create more awareness of the extreme benefits. Ask them if they are interested, educate them, and get them saving!
You can rely on us to help you along the way with questions and consulting.
Whenever you’re ready, there are 2 ways I can help you:
1. For tips on Retirement Plans follow me on LinkedIn: @drewtirney
2. Free client/prospect consulting to add new business to your book: drew@401kinabox.com
Grow your Retirement Plan business by allowing us to be your expert support.
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