A Self-Employed 401(k) plan, also known as a Solo 401(k) or an individual 401(k), is a type of retirement savings plan that is designed for self-employed individuals and business owners without any full-time employees other than the owner(s) and their spouse. It allows for both employer and employee contributions, and it has relatively high contribution limits compared to other types of retirement plans. Some key things to know about Self-Employed 401(k)s include:
Contributions: With a Self-Employed 401(k), you can make contributions as both an employer and an employee. As an employer, you can contribute up to 25% of your net self-employment income or $58,000 for 2021 and 2022, whichever is less. As an employee, you can contribute up to $19,500 for 2021 and 2022 with a catch-up contribution of $6,500 if age 50 or older.
Eligibility: Any self-employed individual or business owner without any full-time employees other than the owner(s) and their spouse is eligible to participate in a Self-Employed 401(k) plan.
Deductibility: Employer contributions to a Self-Employed 401(k) plan are tax-deductible for the business.
Investment options: Self-Employed 401(k) funds can be invested in a variety of options, including stocks, bonds, mutual funds, and ETFs.
Rollovers: Funds from other qualified retirement plans such as 401(k) and traditional IRA can be rolled over into a Self-Employed 401(k), but rollovers from other Self-Employed 401(k) plans are not permitted during the first two years of participation.
Deadlines: Self-Employed 401(k) plans must be established by December 31st of the year for which the plan is effective.
Withdrawals: Withdrawals from a Self-Employed 401(k) before age 59 1/2 may be subject to a 10% penalty in addition to income taxes. After age 59 1/2, you can withdraw funds without penalty, but you will have to pay income tax on the amount withdrawn.
RMDs: Required Minimum Distributions (RMDs) must begin at age 72.
Simplicity: One of the benefits of a Self-Employed 401(k) is its simplicity, as it has fewer reporting and disclosure requirements than other types of retirement plans.
It's important to consult with a financial advisor or tax professional to determine if a Self-Employed 401(k) is the right choice for you and your business. They can help you understand the specific rules and regulations of the plan, as well as help you to calculate the maximum contribution limits and make sure you are in compliance with the IRS rules.