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Small Business Retirement: What is a Solo 401(k)

By on November 20, 2022 4 min read

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Small Business Retirement: What is a Solo 401(k)

When you're self-employed, it's important to plan for retirement just like everyone else. One of the best options for small business owners is a Solo 401(k) plan. This type of account lets you save money for retirement while taking advantage of tax breaks. Here's what you need to know about Solo 401(k) plans and how they can help you save for the future.

Further reading: Different Retirement Plans for Small Business Owners

What Is A Solo 401(k) Plan, And Who Can Use it?

A Solo 401(k) is a retirement savings plan designed specifically for small business owners with no employees and self-employed individuals. Unlike a traditional 401(k) plan, which must be sponsored by an employer, a Solo 401(k) can be set up by anyone with their own small business. Because there are no employees other than the owner, the Solo 401(k) offers many benefits, including high contribution limits and the ability to make catch-up contributions if you're over 50. Solo 401(k) plans are relatively simple to administer, especially when you use Penelope to get started!

Start your Solo 401(k) for as low as $8 a month with Penelope!

How Does A Solo 401(k) Plan Work for Small Business Owners?

A Solo 401(k) is a retirement savings plan designed specifically for small business owners without full-time employees. As the name suggests, you're on your own when it comes to funding the account - but that doesn't mean you can't save significant amounts of money. 

This plan allows business owners to make both employee and employer contributions to their retirement account. Employer contributions are made pre-tax, which can help reduce your taxable income for the year. Employee contributions are made after taxes have been deducted from your paycheck. Both types of contributions are tax-deferred, which means they grow tax-free until you withdraw the money in retirement.

You can choose to invest your Solo 401(k) in a variety of different assets, including stocks, bonds, and mutual funds. With a Solo 401(k), you're in control of your retirement savings and can make changes to your account anytime. If you're self-employed or run a small business, a Solo 401(k) is an ideal way to save for retirement.

What Are The Benefits Of Using A Solo 401(k) Plan For Small Business Owners?

Unlike traditional 401(k) plans, which must be sponsored by an employer, a Solo 401(k) can be established by anyone with a small business or self-employment income. There are many benefits of using a Solo 401(k) plan, including the ability to make large contributions and the potential for tax-free growth.

For small business owners, retirement planning can be a challenge. A Solo 401(k) plan offers the flexibility to tailor your retirement savings to your unique situation. For example, you may choose to make catch-up contributions if you're age 50 or over, or you may elect to make Roth contributions if you expect to be in a higher tax bracket in retirement. You can also choose how your assets are invested, allowing you to manage your retirement savings. Another advantage of a Solo 401(k) plan is the high contribution limits which we will discuss next. 

Start your Solo 401(k) for as low as $8 a month with Penelope!

How Much Can You Contribute To A Solo 401(k) Plan Each Year?

One of the biggest advantages of a Solo 401(k) is that it allows you to contribute up to $22,500 per year for 2023 ($30,000 in 2023 if you're over the age of 50). This high contribution limit means you can save a significant amount for retirement. The total contributions to a Solo 401(k) account, not counting catch-up contributions for those age 50 and over, cannot exceed $66,000 for 2023.

What Are The Restrictions On Using A Solo 401(k) Plan?

The Solo 401(k) plan is a great retirement savings option for small business owners and self-employed individuals. However, there are a few restrictions to be aware of when using this type of plan.

First, the Solo 401(k) must be established by the small business owner himself or herself - it cannot be set up by an employee. Second, small business owners must have no full-time employees other than themselves and their spouse. Finally, the small business must not be a publicly-traded company. Other than these restrictions, the Solo 401(k) offers many benefits and is a great way to save for retirement.

Start your Solo 401(k) for as low as $8 a month with Penelope!

How Can A Small Business Owner Set Up A Solo 401(k)?

 You can still set up a 401(k) if you don't have any employees; that's what who the Solo 401(k) is for.

There are a few things you'll need to do to set up a Solo 401(k). First, you'll need to choose a custodian for your account. This can be any financial institution that offers Solo 401(k)s, such as a bank, brokerage firm, or credit union. Next, you'll need to open a Solo 401(k) account with your chosen custodian. Once your account is open, you'll need to fund it. You can do this by making contributions from your small business' earnings. Finally, you'll need to invest your Solo 401(k) funds. You can choose from a variety of investment options, depending on your custodian. For example, you may be able to invest in stocks, bonds, mutual funds, and exchange-traded funds.

With a Solo 401(k), you can enjoy the same retirement savings benefits as with a traditional 401(k). And because you're the only participant in the plan, there are no required minimum distributions until after you turn 70½. Setting up a Solo 401(k) is a great way to save for retirement if you're self-employed or own a small business with no employees.

Let Penelope Help You Set Up Your Solo 401(k)

A Solo 401(k) plan can be a great way for small business owners to save for retirement. The plan is easy to set up and offers many benefits, including tax savings and the ability to contribute more money each year than you could with other retirement plans. If you’re interested in learning more about Solo 401(k) plans or need help setting up your own, let Penelope help. We can walk you through the process and answer any questions you have about using this type of retirement plan.

Penelope | Small Business Retirement

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