Self-employed 401(k)
A self-employed 401(k), also known as a solo 401(k), can be an option for maximizing retirement savings even if you're not making a ton of money.
Who can open one?
If you are self-employed or own a business or partnership with no employees you can open a self-employed 401(k). A spouse who works in the business can participate as well.
How it works
You get 2 opportunities for contributing to a self-employed 401(k)—first as the employee, and again as the employer.
As the employee, you can choose to make a tax-deductible or Roth contribution of up to 100% of your compensation, with a maximum of $19,500 in 2020 ($19,000 in 2019). Once you're over age 50, you can also make catch-up contributions—for 2020 you can save an extra $6,500, for a total of $26,000 ($25,000 in 2019).
As the employer, you can contribute up to 25% of your eligible earnings. The employer contribution is always made before tax. (Again, consult a tax expert or the IRS website for details on computing eligible earnings.)
Who it may help
These accounts give small business owners the opportunity to save a significant amount of money each year. The total that can be contributed for employee and employer is $57,000 in 2020 ($56,000 in 2019), plus an additional $6,500 ($6,000 in 2019) for people age 50 and over.
Things to keep in mind
After the plan assets hit $250,000, you have to file Form 5500 with the IRS.
The deadline for setting up the plan is the end of the fiscal year, generally the last business day of the year. You can make employer contributions to the account until your tax-filing deadline for the year, including extensions.
In next blogpost, we will discuss Simple IRA.