Self Employed? 3 Reasons a Solo 401(k) Could Be Your Best Investment

Of all the benefits associated with owning your own business, a Solo 401(k) may be one of the sweetest.

One of the scariest parts of opening a business is the number of things you must depend on yourself to take care of. For example, instead of counting on an employer to set up a retirement account, you're the one in charge. And as overwhelming as it may all seem at first, something that comes as a surprise to many new business owners is how capable they are of doing it all. With a Solo 401(k), small business owners can plan for the future while saving money today.

What is a Solo 401(k)?

Like a traditional 401(k), a Solo 401(k) is a retirement account. It's available only to self-employed business owners with no full-time employees. There is one exception to that rule, though. If you employ your spouse, you can also contribute to a 401(k) on their behalf.

Of all the investments you make between now and the day you retire, a Solo 401(k) might just be your best. Here's why.

1. It's customizable

A Solo 401(k) is customizable, meaning that you can tweak it to fit your goals and risk tolerance. For example, you have the option of setting up a traditional Solo 401(k) or a Roth Solo 401(k). Here's how they differ:

• Investing in a traditional Solo 401(k) means your money is withheld pre-tax. That means that you don't pay taxes on your income until you've subtracted the amount contributed to the account. Let's say you earn $60,000 next year and invest $20,500 in your 401(k). Instead of paying income tax on $60,000, you would pay taxes on $39,500 ($60,000 − $21,500 = $38,500).
• Investing in a Roth Solo 401(k) offers two options. You can pay no taxes on the amount invested now and wait to pay taxes in retirement when (presumably) your income would be less and your tax burden lower. Or, you can pay taxes on the funds now and pay no taxes as you withdraw the money in retirement.

2. It provides generous contribution limits

You will be pleased to learn that a Solo 401(k) allows you to double-dip. The IRS considers you both the employee and the employer, meaning you can maximize the amount contributed to your retirement account.

• As an "employee" in 2022, you can contribute up to the annual limit of $20,500 ($27,000 if you're age 50 or older).
• As an "employee" in 2023, you can contribute up to $22,500 ($30,000 if you're age 50 or older).
• In addition, as an employer, you can contribute up to 25% of your annual income.
• Between both the employee and employer contributions, the annual total cannot exceed $61,000 for 2022. In 2023, the amount cannot exceed $66,000.

For the 2022 tax year, your total contributions cannot exceed $61,000. The maximum total contributions in 2023 are set at $66,000. That's likely to be far more than you could hope to contribute through an employer.

3. Funds may be accessed before retirement

Running a business takes money, and the IRS knows that you may occasionally need an influx of cash. That's why a Solo 401(k) allows you to borrow up to $50,000 of your invested funds to buy equipment or expand operations.

As long as you meet certain requirements, a Solo 401(k) plan also allows you to withdraw funds in the event of financial hardship.

Few investments are as flexible or as generous as a Solo 401(k) plan. And it's only because you're self-employed that you can take full advantage of it. As long as you have an employee identification number (EIN) you can set up a Solo 401(k) through most online brokers.