What is a Solo 401(k)?

Entrepreneurship is rich in rewards but also heavy with challenges and potential obstacles. Foremost among them is retirement planning. While many employees are given the option of funding a company-sponsored 401(k), those who are self-employed do not necessarily have this luxury—or at least, they don’t think they do. In truth, there is an option available for sole proprietors/independent contractors to get a 401(k) all to themselves, though not very many financial planning groups actually offer it.

It is called, by turn, an individual 401(k), a solo 401(k), a solo k, a uni-k, or even an owner k. All of these terms point to the same basic investment type: It’s similar to the traditional 401(k) plan, but it’s designed strictly for those who are in business for themselves and do not have employees of their own. (The exceptions to this are important ones: Your spouse can still contribute to the account, even if your spouse happens to earn income from your business. There is also some leniency for part-time employees, like a secretary.)

Two Kinds of Solo 401(k)

The similarities between the typical and solo 401(k) are really quite extensive. The solo variant, for instance, comes into the two formats you already know well—traditional and Roth. A traditional solo 401(k) allows you to put money away on a pretax basis, then grow it tax-deferred. When you withdraw it, your money will be taxed—at what could very well be a higher tax rate than what we have today.

The Roth version, meanwhile, entails investing after-tax dollars, growing it tax-free, then withdrawing it and not having to pay anything further for it. For some, the Roth version makes the most long-term sense, though it is worth noting that you are allowed to split your contributions between the two account types, which can also have advantages. Note also that Stonepath Wealth Management is one of the very few financial planning groups to offer the Roth solo 401(k).

The Benefits of a Solo 401(k)

For any sole proprietor looking for a good option to save for retirement, this is a plan with some strong and clear advantages—including the ability to store away a lot of money for retirement. The solo k allows you to make contributions as both employer and employee, so you can ultimately save more this way than with any other type of retirement savings plan. Additionally, the contribution limits are much higher than with other plans.

If you’re a sole proprietor, and have no employees—and if you’ve been seeking a prudent way to plan for your retirement—then the solo 401(k) may indeed be the option for you. To learn more, please contact Stonepath Wealth Management today.

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