Running the entire show as a single business owner is exciting but full of responsibilities at the same time. Suppose you started your business and opened a pooled 401(k) account in which numerous small firms participate. After seeing the impact of this decision, you want to open an account where you can participate solo. Fortunately, solo business owners have plenty of financial resources to leverage, such as pooled to solo 401(k) and more. Choosing the perfect one takes some elbow grease. Let’s make this part easier with some necessary details.
It is similar to traditional 401(k), but only one person can participate. As a business owner, you can add money to the plan as an employee and employer. Employee contribution limit is USD $22,500 for 2023. Anyone aged 50 or more can contribute USD $30,000. It can be a pre-tax or post-tax contribution. Under SECURE 2.0, you enjoy additional flexibility regarding account opening and contributions. Earlier, you needed to open your account in the same year as your contribution period. After the policy upgrade, you can open an account for the last year (suppose 2022) in 2023 and contribute for that year. However, it’s valid only until the final tax filing date.
Remember a few points: if you accumulate USD$250k in your account, submit IRS Form 5500-EZ while filing your tax returns. The plan will become inaccessible if you hire anyone. For help with this retirement plan type, visit solo401k.com.
A Savings Incentive Match Plan for Employees can be a choice if you want to put money into a tax-deferred retirement savings plan. Like Solo 401(k), you can add money as an employer and employee. The year 2023 contribution limits are up to USD $15 500 for people under 50 and USD $3,500 extra for people in their 50s or more. Compared with Solo 401(k), you will realize that the latter offers you more freedom with contributions. Your contributions can attract taxes during payments, but withdrawals will be tax-free. If your firm has employees, you must match their contributions, which makes things cumbersome.
A simplified Employee Pension (SEP) IRA lets business owners contribute more annually. You can shift 20% of your net income off your business as a self-employed. In 2023, the limit is USD $66,000. While a higher contribution limit looks attractive, your business should be able to produce significant earnings. More precisely, anyone over 50 can contribute USD $ 19k (20% of USD $95,000). It means your net earnings should be at least this much to increase your payments to the plan. If you look at Census Bureau data for 2021, the average self-employment income for men was around USD $63k, and for women USD $38k as per Chiang Rai Times.
Most small business owners, freelancers, and gig workers choose Solo 401(k) because of its ability to help you invest your money into different assets and grow it. Others typically remain limited to real estate or stocks. With this savings plan, you can check an opportunity in cryptocurrency, startups, precious metals, and more. You only need to understand how it works to reap the benefits.