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How Exactly Does a Solo 401k Help Your Small Business?

For the self-employed individual, one of the biggest drawbacks is not having access to the enticing retirement options available through large companies. While the freedom and independence inherent in a solo venture is incredibly rewarding, some people hesitate at the idea of self-employment due to the risk in not having a bigger company behind them.

Fortunately, a solo 401k retirement plan provides a way for the self-employed worker to reap the benefits usually only reserved to large companies while still enabling them to enjoy the freedom that they crave.

What are the Benefits of a Solo 401k?

When you are the only worker and the only boss within your company, you have the unique opportunity to enjoy benefits as if you were two separate people. The specific benefits of a Solo 401k plan are:

  • Incredible Tax Deductions. With a solo 401k, you can contribute to your retirement plan in two distinct capacities: as employer and as employee. Because of this, Solo 401k plans allow for the highest contribution maximums as compared to other retirement options available to the self-employed.
  • Option for “Roth” or “Traditional” Retirement Plan. When taxes should be deducted from your retirement contributions is a decision that should be made on a case by case basis. If you elect to contribute to your plan with after-tax money (“Roth” 401k option), you won’t have to worry about the money being taxed when you’re ready to start dipping into the fund in your retirement. If, however, you believe that it will be more beneficial for you to contribute pre-tax dollars to your fund (“Traditional” 401k option), you can do so. The choice is yours with a solo 401k.
  • Loan Availability. One of the biggest risks to going it alone in your business is that when financial disasters occur, there are few places to which you can turn for help. A Solo 401k allows you to take out loans when needed. In fact, you can take out as much as $50,000 from your Solo 401k or 50% of the value of the plan (whichever amount is less).

What Factors Should I Consider When Selecting a Solo 401k Plan?

There are a number of items you’ll want to take into consideration when selecting your 401k plan including:

  1. Costs Associated with Plan. You should attempt to find a plan that does not impose any extra fees.
  2. Plan Initiation and Maintenance. Setting up your plan should be a quick and easy process. Any plan that seems like it will take a long time and will involve a ton of steps is likely not worth the effort.
  3. Ability to Customize Plan. The ability to customize your plan is important. Ensure that your plan provider allows you to choose from a variety of different investment options.

Final Thoughts

A Solo 401k is an effective way to overcome one of the biggest hurdles associated with self-employment: retirement planning. Solo 401ks are excellent options that are reserved solely for single member companies and should be strongly considered by anyone who is self-employed.

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