Are you an independent entrepreneur looking to invest in a suitable retirement plan that also promises tax benefits? Try a self-directed Solo 401(k). The program lets you invest your retirement savings in various places per the IRS rules. These include cryptocurrency, real estate, annuities, and more. With such control over your money, protecting and growing your wealth becomes easy. Isn’t it? However, finance experts suggest that the true strength of a Solo 401(k) lies in its high contribution limits. For 2023, anyone under 50 can add up to USD $66,000 to their account. On the other hand, people aged 50 and over can keep aside USD $73,500.

The improved 2023 contribution limits for Solo 401(k) have made things interesting for investors. However, if you plan to open one for your business, you must consider the timing. Some can benefit more if they act on it sooner. So, let’s understand a few critical things in this context.

Business structure

Your compensation can be of two types based on your business format. One includes a partnership, LLC, or sole proprietorship. Any income from this model belongs to the ‘pass through’ category. The business’s net income is the owner’s income. On the other hand, any company operating as C-Corporation or S-Corporation doesn’t pass the entire income to the owner. You are an employee of your business and receive W-2 wages. A part of the income can get a treatment as shareholder distributions, ridding it of the payroll Medicare and Social Security taxes. You can contribute only your W-2 wage to a 401(k).

Employee and employer contributions

Both employee and employer can contribute to Solo 401(k) plans. In the case of an owner-only business, you are your company’s employee. As an employee, your contribution limit will depend on your business earning. In 2022, the limit was USD $20,500 for people less than 50 years of age. Anyone in their 50s or above could add USD $6,500 more. In 2023, the revisions have increased the contribution limit – USD $22,500 for those under 50 and USD $30,000 for those 50 and above. A business owner of a pass-through entity can consider a business’s net income as his compensation for contribution. 

As for employer contributions, a business can contribute to the plan based on profit sharing. A W-2 compensation format allows an employer to pay a maximum of 25% of wages. Calculations can be complex if it concerns a pass-through entity. 

Deadline for account opening

Under SECURE Act 1.0, sole proprietors and single-member LLCs on Schedule C can open their accounts in 2023 and contribute as profit sharing for the last year. Sole proprietors can have a window till they file their federal tax returns or Form 1040. The due date is April 15, 2023. If someone requests an extension, it can be October 15, 2023. 

Many complexities are involved in the process, even if it is easy to navigate. Check and verify all the details to know what step you need to take and when. After all, it is an opportunity to improve your retirement savings for a better tomorrow.

 Additional options

Besides the Solo 401(k), independent financiers have access to other plans. For example, SEP IRAs are suitable for those who don’t own a business but still want to contribute in their name. The employer limit is 25% of the salary or USD $58,000 in 2023. 

Meanwhile, catch-up contribution limits have stayed the same in recent years. It stands at USD $6,500 for individuals aged 50 and above. With such options, you can create a strong retirement portfolio with minimal effort. Just remember to update your plans every year according to available rules and regulations so that you can maximize results out of it. 

Wrap-Up

The Solo 401(k) plan offers lucrative opportunities for independent financiers. It can help you save more in the present and reap the benefits in the future. The 2023 contribution limits are higher than ever, so make sure to use this chance and create a strong retirement portfolio based on your needs. However, don’t forget to check the rules for yourself and keep them updated. That way, you can make smarter decisions and secure your future. Take advantage of the Solo 401(k) plan today, and enjoy a fruitful retirement tomorrow!

Frequently asked questions

  • Is it possible to contribute more than the contribution limit?

 No, you cannot contribute more than the set limits. That will attract a penalty from the IRS.

  • Can other family members also contribute to my Solo 401(k)?

 Yes, your spouse or any other qualified individual can also add to your account and enjoy the benefits. 

  • How can I set up a solo 401(k) account?

 You will need to contact your plan provider and start the process. There are plenty of providers available, so compare the features and select one that fits your needs best! We hope this article has helped you understand why Solo 401(k) is a great retirement option, and how it can help you build a secure financial future. Pay attention to the contribution limits and deadlines, and get started with your account! 

  • What happens to the account after I retire?

 After you reach retirement age, you can take money out of your Solo 401(k) account. The IRS has placed withdrawal limits on the amount that you can take out each year. You should also speak to a tax advisor before making any withdrawals to ensure that your retirement plan is optimized for maximum returns. 

  • Can I rollover my existing 401(k) to a Solo 401(k)? 

Yes, you can rollover your existing 401(k) to a solo 401(k). You should speak to an experienced tax advisor and plan provider to ensure that the process is completed correctly and all the relevant details are taken into account.

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