One of the best things about being a salaried employee is getting access to a host of workplace benefits. These might include things like paid time off, subsidized health insurance, and access to a 401(k) plan.
If you're self-employed, you don't get these benefits. You have to buy your own health insurance, and if you take time off, it's on your own dime (or at the expense of your own income). And if you want to save for retirement, you're on your own there, too.
But that doesn't mean you don't have options. You can opt to open an IRA and use it to build yourself a nest egg. Or, you could look into opening a solo 401(k) plan, which is a special type of 401(k) you're eligible for if you have self-employment income.
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Solo 401(k)s are a retirement plan specifically designed for self-employed individuals. If you own a business but have multiple employees, you generally cannot contribute to a solo 401(k). But if you're a one-person operation or it's just you and a spouse, a solo 401(k) may be on the table.
Now if you've saved in a workplace 401(k) plan before, you might think you're familiar with solo 401(k)s. But actually, the two are different. Here are a few key things to know about solo 401(k)s.
1. Contribution limits are higher
In 2023, traditional and Roth 401(k)s max out at $22,500 for savers under the age of 50, and $30,000 for savers 50 and over. But solo 401(k)s come with much higher contribution limits. These plans max out this year at $66,000 if you're under 50, or $73,500 if you're 50 or older.
2. Your personal contribution limit will hinge on your income
With a workplace 401(k), you can contribute any percentage of your salary you want to your 401(k), provided you're staying within the annual contribution limits established by the IRS. But the amount you're eligible to contribute to a solo 401(k) will hinge on your specific earnings.
You're allowed to contribute up to 25% of your self-employment income to a solo 401(k), up to $66,000 or $73,500, depending on your age. This means, however, that if you only have $100,000 of self-employment income and you're 35 years old, you can't contribute $66,000, even though that's the limit this year.
3. You can save in a solo 401(k) even if you have a salaried job
Many people have side hustles these days, whether to meet long-term financial goals or keep up with inflation. You should know that even if you have a full-time job where you're a salaried employee, if you earn self-employment income on the side, you may be eligible to contribute to a solo 401(k).
Although solo 401(k)s may not be as well known or widely used as workplace 401(k)s, they're a valuable retirement savings tool nonetheless. If you're self-employed in any capacity, it pays to learn more about solo 401(k)s, and to see if saving in one could get you closer to meeting your retirement goals.
