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The Power of the Solo 401(k)

Writer: Nick Allen
Nick Allen
27 minutes ago
2 min read

Being self-employed means working tirelessly to live out your vision and build your business. When it's finally time to give serious thought to a retirement savings vehicle, the SEP IRA is usually the first thing that comes to mind – and maybe it’s the only thing you remember your accountant mentioning. While the SEP IRA might be perfect for your situation, it can also mean leaving real money and flexibility on the table. Another option sole proprietors can consider is a solo 401(k).


The Difference

A Solo 401(k) is great for sole proprietors who are already taking full advantage of their SEP IRA and want more saving power. If used correctly, it can be a powerful wealth-building tool. This is available to sole proprietors, LLCs, S-corps, and 1099 workers. It carries a higher contribution limit than a SEP IRA, and can even include a Roth option.


A Solo 401(k) can include a Roth component, which can be critical for younger people, or those expecting higher future tax rates. Saving in a Roth Solo 401(k) means saving after-tax dollars that compound into tax-free retirement income. Doing this in a Solo 401(k) is more powerful than a Roth IRA due to the higher annual contribution limit.


The contribution limit of a Solo 401(k) is the core differentiator for sole proprietors. Since you are both the employer and employee, you can contribute as both. This could mean contributing up to $72,000:

  • Employee Deferral: $24,500 (or 100%) of compensation.

  • Employer Profit-Sharing: up to 25% of W-2 wages (S-Corp) or 20% of net self-employment income (sole proprietor or LLC).


This does not include the additional catch-up contributions available to certain age groups. These can bring totals up to $80,000 and $83,250, respectively:

  • Ages 50-59 & 64+: $8,000

  • Ages 60-63: $11,250


The Solo 401(k) also includes a loan provision. While we generally don’t recommend taking loans from retirement plans, a Solo 401(k) lets you borrow up to 50% of your vested balance (max $50,000). The SEP-IRA simply doesn’t have this feature, which adds to the power of the Solo 401(k).


Trade-Offs to Consider

Of course, you should consider trade-offs when comparing two retirement plans. One catch with the Solo 401(k) is that it requires more administrative setup and costs more than a SEP-IRA. Once a Solo 401(k) exceeds a balance of $250,000, there are additional forms to file annually. Setting one up also requires slightly more upfront work, which is still likely worth it, but it's a consideration nonetheless.


The question is, is a Solo 401(k) right for you?

Best Fit: Sole Proprietors with a meaningful net income (especially true for those who are already maxing out their SEP-IRA).


Not Ideal: Someone with either low or highly variable income. The SEP-IRA's simplicity wins in cases like these.


The bottom line: If you work for yourself and want to maximize your retirement savings, the Solo 401(k) is worth considering. To learn more or see what is best for your situation, set up a meeting to discuss these options with one of our financial advisors today.

 

 

 

 

 

Whitaker-Myers Wealth Managers is an SEC-registered investment adviser firm. The information presented is for educational purposes only and intended for a broad audience. The information does not intend to make an offer or solicitation to sell or purchase any specific securities, investments, or investment strategies. Investments involve risk and are not guaranteed. Whitaker-Myers Wealth Managers reasonably believes that this marketing does not include any false or misleading statements or omissions of facts regarding services, investment, or client experience. Whitaker-Myers Wealth Managers has a reasonable belief that the content will not cause an untrue or misleading implication regarding the adviser’s services, investments, or client experiences. Please refer to the firm’s ADV Part 2A for material risks disclosures.

​

Past performance of specific investment advice should not be relied upon without knowledge of certain circumstances of market events, the nature and timing of the investments, and relevant constraints of the investment. Whitaker-Myers Wealth Managers has presented information in a fair and balanced manner.

​

Copyright (c) 2023 Clearnomics, Inc. and Whitaker-Myers Wealth Managers, LTD. All rights reserved. The information contained herein has been obtained from sources believed to be reliable, but is not necessarily complete and its accuracy cannot be guaranteed. No representation or warranty, express or implied, is made as to the fairness, accuracy, completeness, or correctness of the information and opinions contained herein. The views and the other information provided are subject to change without notice. All reports posted on or via www.clearnomics.com or any affiliated websites, applications, or services are issued without regard to the specific investment objectives, financial situation, or particular needs of any specific recipient and are not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Past performance is not necessarily a guide to future results. Company fundamentals and earnings may be mentioned occasionally, but should not be construed as a recommendation to buy, sell, or hold the company's stock. Predictions, forecasts, and estimates for any and all markets should not be construed as recommendations to buy, sell, or hold any security--including mutual funds, futures contracts, and exchange traded funds, or any similar instruments. The text, images, and other materials contained or displayed in this report are proprietary to Clearnomics, Inc. and constitute valuable intellectual property. All unauthorized reproduction or other use of material from Clearnomics, Inc. shall be deemed willful infringement(s) of this copyright and other proprietary and intellectual property rights, including but not limited to, rights of privacy. Clearnomics, Inc. expressly reserves all rights in connection with its intellectual property, including without limitation the right to block the transfer of its products and services and/or to track usage thereof, through electronic tracking technology, and all other lawful means, now known or hereafter devised. Clearnomics, Inc. reserves the right, without further notice, to pursue to the fullest extent allowed by the law any and all criminal and civil remedies for the violation of its rights.

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Whitaker-Myers Wealth Managers is an SEC-registered investment adviser firm. The information presented is for educational purposes only and intended for a broad audience. The information does not intend to make an offer or solicitation to sell or purchase any specific securities, investments, or investment strategies. Investments involve risk and are not guaranteed. Whitaker-Myers Wealth Managers reasonably believes that this marketing does not include any false or misleading statements or omissions of facts regarding services, investment, or client experience. Whitaker-Myers Wealth Managers has a reasonable belief that the content will not cause an untrue or misleading implication regarding the adviser’s services, investments, or client experiences. Please refer to the firm’s ADV Part 2A for material risks disclosures.

​

Past performance of specific investment advice should not be relied upon without knowledge of certain circumstances of market events, the nature and timing of the investments, and relevant constraints of the investment. Whitaker-Myers Wealth Managers has presented information in a fair and balanced manner.

​

Copyright (c) 2023 Clearnomics, Inc. and Whitaker-Myers Wealth Managers, LTD. All rights reserved. The information contained herein has been obtained from sources believed to be reliable, but is not necessarily complete and its accuracy cannot be guaranteed. No representation or warranty, express or implied, is made as to the fairness, accuracy, completeness, or correctness of the information and opinions contained herein. The views and the other information provided are subject to change without notice. All reports posted on or via www.clearnomics.com or any affiliated websites, applications, or services are issued without regard to the specific investment objectives, financial situation, or particular needs of any specific recipient and are not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Past performance is not necessarily a guide to future results. Company fundamentals and earnings may be mentioned occasionally, but should not be construed as a recommendation to buy, sell, or hold the company's stock. Predictions, forecasts, and estimates for any and all markets should not be construed as recommendations to buy, sell, or hold any security--including mutual funds, futures contracts, and exchange traded funds, or any similar instruments. The text, images, and other materials contained or displayed in this report are proprietary to Clearnomics, Inc. and constitute valuable intellectual property. All unauthorized reproduction or other use of material from Clearnomics, Inc. shall be deemed willful infringement(s) of this copyright and other proprietary and intellectual property rights, including but not limited to, rights of privacy. Clearnomics, Inc. expressly reserves all rights in connection with its intellectual property, including without limitation the right to block the transfer of its products and services and/or to track usage thereof, through electronic tracking technology, and all other lawful means, now known or hereafter devised. Clearnomics, Inc. reserves the right, without further notice, to pursue to the fullest extent allowed by the law any and all criminal and civil remedies for the violation of its rights.

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