Solo 401 K is a powerful financial instrument for self-employed people to have their retirement planned in a manner that would shield a substantial portion of their income from taxes.
Salient features of Solo 401 K
It capacitates you to act as both employer and employee, significantly raising the investment bar over other traditional self employed retirement plans.
You can play the role of your own employee and invest your entire earning to the plan. The cap is $17,500 annually, with those over 50 years allowed $23,000 (for the year 2013). Next, you can switch into the role of employer and divert an extra 20% of the business’s total income as a profit sharing contribution. IRS rules facilitate contribution of more than a typical match as employer. The government underpins the efforts of self-employed persons like freelancers, consultants etc to have their future secured by offering a $50,000 tax break.
Solo 401 K plan also encompasses the spouses, who are authorized to contribute equally as the business owner. Married couples can score an awesome saving of about $100,000 annually.
The plan enables you to design your employee contributions in Roth version also. This unique feature takes care of taxes applicable in future. This implies that at the time of putting the contribution into the 401 K account, you are allowed to have those contributions deducted. The money becomes completely tax free when it withdrawn from the plan in retirement. The profit sharing part of the contribution as employer will stay tax sheltered prior to retirement. Post retirement, when you would be swimming in savings, tax deductions would take place.
Ways to set up the plan
Setting up and administering the plan can be expensive and awkward. Financial service providers assist in socking away your money under this scheme, but the underlying investment objective should be carefully weighed prior to choosing a provider.
If you opt for mutual funds, large firms like Fidelity, T. Rowe Price, Charles Schwab, Vanguard can help set up Solo 401 K accounts for nearly $20 annual administration fee. Additional IRS forms have to be filled out if the self employed retirement plans balance exceeds a set limit.
Such firms customarily offer free help in establishing and managing the plan through its life. Costs are kept down by restricting participants from drawing loans against their accounts. However, the expense ratios of mutual funds and stock trading charges can be hard on your pocket. You should explore the plan variations offered by different companies before settling on one.
Other important information
The plan establishment deadline date is 31st December. The amount of contribution and its time is at your own volition. Solo 401 K plans are ideal for those self-employed people who wish to set aside huge sums of money for their retirement plans and who earn abundantly from their ventures.
The documentation aspect has to be handled by the Solo 401 K administrator. You have to take care of contributing to the plan prior to deadline and filing relevant IRS forms. However, one should seek the expert help of certified public accountant before putting your money in any self employed retirement plans.
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