What You Need to Know About a Solo 401(k)

While there are so many benefits to self-employment, one thing that every businessowner needs to take into account is retirement. If you own a business and have no employees, one great option available to you is the solo 401(k). But just what is a solo 401(k)? Read on to learn everything you need to know about this special plan.

What is a solo 401(k)?

As a business owner in Phoenix, AZ, you can only open a solo 401(k) if you have no regular employees. Here’s a simple breakdown of the basics of this special type of retirement account:

  • Eligibility: There are no age or income restrictions for a solo 401(k). The primary eligibility requirement is that you must be a business owner with no employees.
  • Contribution limit: You can contribute up to $58,000 per year as of 2021 regulations. If you’re over 50, you’re allowed to make a catch-up contribution of an additional $6,500.
  • Taxes: If you have a traditional 401(k), contributions are made pre-tax and qualified distributions are taxed as income. If you have a Roth 401(k), contributions are made with after-tax dollars, but qualified distributions are tax-free.
  • Opening an account: All it takes is an employer identification number to open a solo 401(k) of your choice with many online brokers.

What are the tax advantages of a solo 401(k)?

One of the greatest benefits to this retirement plan is that you get to pick your tax advantage. The main thing to consider is how much you expect your income to be after retirement. A traditional 401(k) is the ideal choice if you expect your income to go down following retirement. You’ll see your tax break today, as opposed to the Roth option, which defers your tax break until after retirement. If you expect to see a bump in your income post-retirement, it’s generally better to choose the Roth solo 401(k).

Can a spouse be covered under a solo 401(k)?

While there’s a strict no-employee rule in place for a solo 401(k), your spouse is the one exception. Your spouse can earn income from your business in Phoenix, AZ, potentially doubling the amount you can contribute as a family.

How can I open a solo 401(k)?

It’s a fairly simple process to open a solo 401(k) online, but you need an employer identification number. Your advisor will have you fill out a plan adoption agreement and an account application. You’ll set your contributions and have access to a range of investments offered by your provider. Make sure to establish a plan by December 31 if you wish to make contributions for the current year.

If you’re a small business owner in Phoenix, AZ, it’s never too early to start preparing for your retirement, and a solo 401(k) helps you do just that. There’s great peace of mind in knowing that you’ll have a stable source of income after retirement. Contact the experts at Fiduciary Advisors, LTD. today to learn more about the best retirement plans for small business owners.