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 Earnings within the account grow tax-deferred until withdrawn at retirement.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.
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