For those who work as a freelancer, solo-consultant, or particular person small enterprise proprietor, you’ve seemingly puzzled: How ought to I save for retirement?
Marvel no extra, right here’s your reply…
Meet the solo 401(ok):
- Solo 401(ok)s are sometimes ignored on the planet of retirement accounts, however they are often an efficient means for self-employed people to save lots of.
- Solo 401(ok)s supply flexibility, excessive contribution limits, and tax advantages.
What’s a solo 401(ok)?
A solo 401(ok) is basically a 401(ok) plan for self-employed people or enterprise house owners who don’t have full-time staff past themselves (and probably their partner).
It really works equally to a daily 401(ok)—with worker and employer contribution choices—however is designed particularly for these with out different full-time staff. It gives extra flexibility than choices like SEP IRAs (which solely enable employer contributions) or SIMPLE IRAs (with decrease contribution limits).
Many individuals mistakenly assume solo 401(ok)s are difficult or just for excessive earners, however the reality is that they’re fairly easy, and so they’re nice for self-employed people of all earnings ranges.
Assist decrease your taxes and develop your financial savings with a solo 401(ok).
High 5 advantages of solo 401(ok)s for self-employed people
Profit 1: Solo 401(ok)s are tailor-made for entrepreneurs such as you
For those who’re a sole proprietor, freelancer, or gig employee, you understand how difficult it may be to steadiness inconsistent earnings with long-term monetary targets. A solo 401(ok) allows you to ramp up your contributions in worthwhile years and reduce in case your earnings takes a dip. You may as well contribute as each the worker and the employer, supplying you with extra methods to save lots of.
One other large perk is the power to make a contribution to your partner. In the event that they’re additionally working with you, they will contribute to the solo 401(ok) with earnings from your online business, probably doubling your retirement financial savings. This may increasingly additionally assist scale back your family’s taxable earnings in the event you’re making pre-tax contributions.
Profit 2: Excessive contribution limits
One of many standout options of a solo 401(ok) is the power to make each worker and employer contributions:
- Worker contribution: In 2025, you may contribute as much as $23,500 as an worker. And in the event you’re over 50, there’s an extra profit: You can also make “catch-up” contributions of as much as $7,500 for ages 50-59 and over age 64, and “super-catch-up” contributions of as much as $11,250 for ages 60-63.
- Employer contribution: Because the enterprise proprietor, you may contribute as much as 25% of your web self-employment earnings (20% for sole proprietors and partnerships).
In whole, you may contribute $70,000 (not together with catch-up contributions) to your solo 401(ok) in 2025. This implies extra room for tax-deferred progress and bigger financial savings general.
Profit 3: Tax benefits
Solo 401(ok)s supply some glorious tax advantages that may assist scale back your tax burden right now whereas saving for retirement.
- Pre-tax contributions: If you wish to decrease your taxable earnings now, you may contribute pre-tax {dollars} to your conventional solo 401(ok). This helps to cut back your present tax invoice, which is particularly useful in high-income years.
- Roth contributions: Many solo 401(ok) plans additionally assist you to make Roth contributions. This implies you pay taxes on the cash now, however certified withdrawals in retirement are tax-free. Providing each pre-tax and Roth choices offers you flexibility in managing each your present and future tax conditions.
- SECURE 2.0 tax credit score: Betterment contains an Computerized Contribution Association of three p.c per pay interval, permitting new plans to say a $500 tax credit score per yr for 3 years.
Profit 4: No earnings limits for Roth contributions
In contrast to Roth IRAs, solo 401(ok)s don’t have earnings limits for making Roth contributions. In case your earnings is simply too excessive to qualify for a Roth IRA, you may nonetheless contribute to a Roth solo 401(ok) and luxuriate in tax-free progress.
Profit 5: Prior yr contributions for brand new plans
Because of the SECURE Act 2.0, solo 401(ok) plans now include a neat little trick: You possibly can arrange a solo 401(ok) after the brand new yr and nonetheless contribute for the earlier yr. For instance, in the event you arrange a solo 401(ok) in March 2025, you may nonetheless make 2024 contributions till your tax submitting deadline (April 15, or October 15 with an extension). This provides you an opportunity to atone for retirement financial savings that will have slipped by way of the cracks.
Getting began: Selecting a solo 401(ok) supplier
In the case of organising your solo 401(ok), you’ll wish to select a supplier that makes issues easy. Search for one that gives clear charges, easy-to-use digital instruments, and a strong observe document of compliance and recordkeeping.
Moreover, you could wish to think about solo 401(ok) suppliers that supply a spread of monetary companies like money accounts or investing companies, that means you may consolidate your monetary life onto one platform.
Meet the Betterment solo 401(ok)
Betterment’s solo 401(ok) is a low-cost funding possibility designed for the self-employed.
Right here’s what you get with Betterment’s solo 401(ok):
- 100% digital setup. No paperwork or mailing checks. Open and handle your account totally on-line.
- Distinctive flexibility. You’ve got the choice to open a standard or Roth solo 401(ok), and your partner can contribute, too.
- Knowledgeable-built portfolios. Select from our choice of low-cost exchange-traded funds (ETFs) that will help you construct wealth over the long run.
- $1,500 tax credit score. Plans embrace computerized contribution preparations and probably qualify for a tax credit score of as much as $500 per yr for 3 years.
- Larger contribution limits. You possibly can contribute $70,000 (plus as much as $11,250 extra in catch-up contributions relying in your age) with a solo 401(ok).
