A Solo 401(k), also known as an Individual 401(k) or Self-Employed 401(k), is a retirement plan designed for self-employed individuals or small business owners with no full-time employees other than a spouse. This plan allows business owners to contribute both as an employer and an employee, maximizing their contributions and tax benefits.
1. Eligibility for a Solo 401(k)
To open a Solo 401(k), the individual must be self-employed or a business owner with no employees other than a spouse. This plan is ideal for freelancers, independent contractors, or small business owners.
2. Contribution Limits
The contribution limits for a Solo 401(k) are higher than those of traditional IRAs. As of 2025, the IRS allows the following contributions:
- Employee Contribution: Up to $22,500 per year (with an additional $7,500 catch-up contribution if over age 50).
- Employer Contribution: Up to 25% of compensation (for self-employed individuals, this is based on net earnings).
Together, these contributions allow a maximum of $66,000 per year, or $73,500 for those 50 and older.
3. Investment Flexibility
One of the most significant benefits of a Solo 401(k) is the ability to self-direct the investments within the plan. This allows you to invest in a wide range of assets, including:
- Real estate
- Private stock
- Cryptocurrency
- Tax liens
- Precious metals
4. Loans from a Solo 401(k)
Solo 401(k) plans typically allow for loans, with a maximum loan amount of $50,000 or 50% of the account balance, whichever is less. Loans must be repaid with interest within five years, though a longer term may be allowed for real estate purchases.
5. Tax Advantages
Contributions to a Solo 401(k) are tax-deferred, meaning they reduce your taxable income for the year in which they are made. Earnings within the account grow tax-deferred until withdrawn at retirement. Roth Solo 401(k) options are also available, allowing for tax-free growth and withdrawals in retirement.
6. Tax Documentation
Unlike other Self-Directed IRAs (SDIRAs) at AET, a Solo 401(k) does not generate tax documentation such as Form 1099 or 5498. Clients are responsible for tracking their own contributions and earnings for tax reporting purposes.
Conclusion
A Solo 401(k) offers self-employed individuals or small business owners an opportunity to significantly increase retirement savings through higher contribution limits, tax benefits, and a wide range of investment options. Whether you're looking to reduce your taxable income or diversify your portfolio, this plan provides valuable flexibility and control over your retirement funds.
For further details, you can explore more on Accuplan's Self-Directed 401(k) page.
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