A solo 401K is a retirement plan intended for self-employed individuals. As with an employee 401K, it also features tax-deferred advantages for those who participate in the plan.
If you are self-employed as an individual contractor, or own a small business without regular employees, you may be qualified for a Solo 401K. The business may be incorporated or not, and partnership owners may also participate if the partners are the only employees of the business. If your spouse also works for the business, he or she may also avail of a Solo 401k plan.
A Solo 401K is more beneficial than other retirement plans for self-employed individuals for a number of reasons. For one, your contributions to a Solo 401k could be higher compared to other plans. The amount you put into the plan as well as the profits it makes are tax-deferred and would give you more opportunities for tax deductions. Also, how much you can contribute to your 401K plan could vary yearly. This would help you cope with your business’ changing income. If your company makes less profit in one year compared to others, you have the option to contribute less or nothing at all to your 401k account for that year.
A Solo 401k also has a provision for tax-free loans with your account as collateral. The amount of the loan could be as high as half of the account and may be used for any purpose. The loan would be payable in five years, but if used to purchase a residence, the payment period could even be longer.
If you foresee your business growing to a point where you would need to hire fulltime employees, then a Solo 401K plan may not be a good option for you. It is best to consult with a provider as to the options that would be more desirable.