For Sole Business Owners, Retirement Plans Are Twice as Nice

When you run your own business, you get to call the shots. That kind of power is probably why you launched your firm, but during the rush of engineering your dreams, you may have overlooked the Tommy-Bahama beach shirt destination that awaits you at the tail end of your exit strategy: retirement.  You may be in the trenches today, but tomorrow isn’t too far around the corner.  Understanding the myriad options available to you – among a Solo 401k or a SEP IRA or any other alternatives – is critical.  For sole business owners, one option may be twice as nice: the Solo 401K allows you pay yourself twice, both as the employer and as the employee.

Setting up a Solo 401k (aka Uni-K or Individual 401K) plan can be a wise move for sole proprietors, owners of S Corporations, C Corporations or partnerships. The plans are simple: you do not need to file Form 5500 until your plan reaches $265,000—certain to save time and costs. You are allowed to exclude employees who work fewer than 1,000 hours annually (if you do have employees who exceed these work hours, you cannot set up the Solo 401k). Better still, the Solo 401k is for both you and your spouse. This means that as a household you can save away double of the annual contribution limits.

Contributions to a Solo 401k plan are broken down into two classes: elective and non-elective. Elective contributions allow you to put money into the plan as the employee of the business; non-elective contributions allow you to fund the plan as an employer.  Total contributions to Solo 401k plans cannot exceed $66,000 for 2023, so you can max out your elective (employee) contributions at $22,500 and your business can contribute an additional non-elective maximum of $43,500 to your account.  Individuals over age 50 are also eligible for an extra $7,500 catch-up contribution. Non-elective (employer) are limited to 25% of annual compensation, so your ability to max is limited by your earnings.

Other benefits of the Solo 401k over the SEP IRA include that 100% of your pay can be set aside before taxes for a greater earning potential. And you are allowed to borrow from your Solo 401k (up to either $66,000 or 50% of their account value) with the following terms: loans will be repaid over an amortization schedule of five years or less; regular payments made at least quarterly; with an interest rate of +1%. Always check the details of the plan, however, as these conditions do vary.

One of the greatest perks of owning your own business is having control over your retirement plan.  With a Solo 401k plan, you get to pay yourself twice, both as the employer and as the employee. That is something you definitely will not forget when it comes to retirement day at the end of your successful entrepreneurial adventure.

For more information about investing, financial planning and securing the retirement (for yourself) and the legacy (for your family) that you deserve, please contact us today at 312.669.1650 or use our “Let’s Talk” tool on the right-hand sidebar.

Data here is obtained from what are considered reliable sources as of 2023.  We consider the data used to be relevant and reliable.

Perritt Capital Management, Inc. is the Registered Investment Advisor for Windgate Wealth Management accounts.  Windgate does not provide tax advice. Consult your professional tax advisor for questions concerning your personal tax or financial situation.

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