Solo/Self-Employed 401k! A Dream Retirement Plan! (Save $60k/year!)

Solo/Self-Employed 401k! A Dream Retirement Plan! (Save $60k/year!)


hi this is Brad Rosley welcome to this
week’s version of smart money today we’re going to talk about self-employed
also known as solo 401k as a name implies these these are good for people
that are self-employed with the exception of being able to include your
spouse if he or she works in the same business so these are not for people
that have w2 full-time employees years ago I started my own business I start
off with what’s called a SEP IRA SCP IRA as many self-employed people are
familiar with in the SEP IRA you’re allowed to save a percentage of your
income from the employers standpoint into a retirement plan and these are
nice plans several years back a new option came across my desk that I jumped
on and it’s called this solo or individual 401k first thing I liked
about it as most people will is that there’s no cost to set it up or at least
very little cost if any so you can set up this program unlike a traditional
401k that many people are familiar with at larger companies those plans have a
lot of expenses that are charged back to the employer kind of behind the scenes
those expenses make it unattractive for a smaller employer to set up before 1k
but with the solo 401k there’s virtually no expenses at all
there are also set up through brokerage companies you can invest your solo 401k
money in stocks bonds mutual funds exchange-traded funds CDs money markets
you name it so they’re very flexible on allowing you to create your investment
portfolio let’s suit your needs the real exciting part though is the amount of
money you can invest in these programs the amount is a percentage of what you
make is really extraordinarily unlike a SEP which is 20 or 25 percent of your
income the solo 401k as the name implies allows you to put away on a salary
deferral a 401k contribution dollar for dollar up to the first $18,000 of urine
for example with a SEP IRA if you could put away 25% of your income times let’s
just say you had a side job and made 10 grand
25% of that is obviously 2500 bucks however if you had a solo for 1k you
could put away all $10,000 of that income all tax-deductible the 401k
contribution limit for 2017 is $18,000 so you could put away your first 18
grand tax deductable in your salary deferral if you happen to be over 50
you’ll get the opportunity to put away another 5 grand and call it a catch-up
contribution that brings your 401k contribution up to $24,000 a year and
it’s only going to go up in addition to that you still get to make that SEP IRA
contribution or the 20 or 25% depending on whether or not you’re an S
corporation or e a sole proprietorship so let’s take a couple examples they’ll
put them on the screen here next to me let’s say you made $50,000 this year as
your net income well if you’re under 50 you get away you get the opportunity to
put away 18 grand in the 401k plus another 25% 25% of 50,000 is 12,500 so
you get to put away 18,000 plus 12 5 or just thirty thousand five hundred
dollars tax deductable of your $50,000 income that’s sixty percent of your
income if you happen to be over age 50 and another six grand on that at the
catch-up contribution which is 24 thousand now for their 401k plus a 12
five or a total of 36 five that’s a lot of money
36 five are your 50 grand you’re not paying income tax on that saves you a
boatload in FICA and income tax I’ll do one more example let’s say you made a
hundred and fifty thousand dollars this year the same 401k contribution eighteen
thousand if you’re under age 50 or up to twenty four thousand dollars if you’re
50 year older plus the 25 percent if you have an S corp
that you can put away into the SAP 25 percent times 150,000 along with the cap
on this plan is $60,000 total you’re allowed to put in $60,000 and if you
have a in income of $150,000 or more in your solo 401k if you make I’m sorry if
you’re under age 50 your cap is at fifty four thousand so that’s where you’d be
either case it’s a lot of money as a percentage of your income what happens
if you don’t have that kind of money you don’t have to make any contribution you
have a slow year or you don’t have the funds available don’t make a
contribution here is a good year go ahead and make a contribution it’s very
flexible that way that’s a very nice thing as a small business owner a lot of
times their cash flow might jump up and down year to year three other things the
factor one is you can make a Roth 401k contribution meaning you’re using
after-tax money and the money comes out tax-free that’s an option you can choose
to do with or without or for some of your contribution but not all on the
employee side the employer contribution is always tax deductible only second
thing you want to consider there’s a 1231 deadline to set the plan up you
have to have all the documents in before the end of the calendar year the good
news is the deadline to make a contribution is not until April 15th of
that year I should say on the file in here your texture so have the plan set
up by 1231 and then you have to April 15th of the following year to make your
contribution in any case always always always check with your tax preparer to
make sure you’re following the rules and guidelines I’ve written about this in a
blog post I have this in other videos available on our YouTube channel so
please check them out and subscribe to both of them so you’ll stay in the loop
and get future posts when they come out thanks for listening
have a great day

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17 thoughts on “Solo/Self-Employed 401k! A Dream Retirement Plan! (Save $60k/year!)”

  • If you're married and your spouse is your business partner (with no employees), do you have to have a 401K for each spouse and contribute the same amount for both spouses?

  • Great video. Very helpful. Can I ask, what about a Roth solo 401k? Is the first 18,000 made with after tax money but the 25 percent from the "employer" side still tax deductible?

  • Thanks for watching and the question. The employer contribution is tax deductible at the employer level. It can’t be made as a Roth contribution. You may want to keep them in separate accounts or at least make sure the EE Roth and employer contributions are accounted for correctly.

  • I am about to retire from my federal job… can I roll my TSP (Thrift Savings Plan) into a solo 401K…I am also self employed and I retire 31 December 2018.  I want all the tax savings that I can get…

  • We started a solo 401k and love it. but we are no ready to invest and want to know if we can transfer the funds from our solo 401k that's in a trust account into our existing IRA account. We had someone make our solo 401k plan so we are the trustees and custodian. I just don't want to do anything we're not allowed by the IRS. Any help would be appreciated. I would even pay you for your time if you think you can really help us out. We are maxing out the solo 401k every year.

  • What about phase-out limits on that $18,500 if a spouse is covered by a retirement plan from their employer? Same rules apply?

  • Hi M Sully, thanks for question. What your spouse may have for a retirement plan has no impact on the Solo 401k. If you have self-employment income you can take advantage of this retirement plan.

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  • Great rundown! You mentioned this also helps with FICA. Could you discuss that some more? What about the scenario where no payroll is being paid currently in a Partnership? Wouldn't this require you to start paying payroll and incurring a new FICA liability, as well as the headache of processing payroll?

  • Can you use the solo 401k for the employee contribution and continue to use an existing SEP for the employer contribution? I Assume that you can do both with a solo IRA so is there an advantage of doing it one way over the other?

  • What if I own multiple LLCs but I'm the only member, zero employees, only me contributing each year. would I have to setup for each LLC, or does it all roll up into one contribution as a disregarded entity and I can just create one 401k. Not clear on that.