Many entrepreneurs fail to realize that since they are self-employed, they are both employer and employee and need to fulfill both sides’ tax obligations. A Solo 401(k) retirement plan is specially designed for qualified entrepreneurs and businesses and allows them to save for retirement while offering huge tax benefits and a financial flexibility.

Applying for a Solo 401(K)

Through a Solo 401(k) plan, individuals can contribute as employees and employers from their income before tax. Being an employer, one can deposit up to 25% of their pre-tax salary in profit-sharing contributions. Being an employee, one can save a maximum of $19,500, or 100% of your compensation, depending on the lower amount. Besides, individuals above 50 years of age can make an additional contribution of $6,500 to the plan.

You can follow the steps below to apply for a Solo 401(k) plan:

  • Select a professional plan provider who can assist in starting the plan.
  • Submit the application form and adoption agreement to obtain your account details and EIN or Employer Identification Number. At this time, you have the option to choose from a traditional or a Roth plan.
  • Make contributions to your retirement savings and invest in stocks, certificates of deposit, bonds, mutual funds, index funds, or exchange-traded funds of your choice.
  • Ensure to meet the IRS plan contribution deadlines. All employee contributions to the plan should be submitted by December 31st each year. While all employer contributions should be submitted before April 15th of the following year.

Benefits of Choosing Solo 401(K)

You can start a Solo 401(k) plan and enjoy the following benefits:

  • A high contribution limit is compared to other retirement options that maximize your contributions and enjoy high tax deductions.
  • A tax deferral option to lessen your tax burden.
  • Ability to take a loan from your retirement savings when you immediately need money.
  • Freedom from AUM fees or ‘Asset Under Management’ charges.

Factors to be Considered while Choosing Solo 401(K) Plan

A Solo 401(k) plan is suitable for independent contractors, entrepreneurs, sole proprietors, freelancers, or side-job workers. Ensure to consider the following factors before selecting your Solo 401(k) plan:

Plan Costs: The key benefit of the Solo 401(k) plan is that it is free of any trading costs or asset management fees. It is suggested to choose a plan provider who has low administrative fees and offers complete transparency.

Easy Set-Up and Plan Management: Your 401(k) plan should be easy to understand and set up. Also, it should have a user-friendly dashboard for general plan management tasks. Always check if the plan provider can offer useful online tools like savings reports and monthly analysis for easy investment management.

Quality Support Service: It is recommended to select a provider who offers customer assistance that can help you when you face any plan-related issues.

Flexibility: Lastly, make sure that you select a plan that offers flexibility in contributions, includes funding or borrowing features, and has a variety of investment choices and long-term investment options.

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