Are you self-employed and wondering how best to save for retirement, and which type of account is best? Well, look no further than what's been called one-participant 401(k) plan, solo 401(k), solo-k, uni-k, or a one-participant k.
These plans are nothing more than a traditional 401(k) plan for a business owner that has no employees, or for a business owner and his/her spouse. And what's really great about these plans, according to Uncle Sam, is that business owner wears two hats in a 401(k) plan: employee and employer. And contributions can be made to the plan in both capacities, says the IRS.
Here's what you need to know about contributing to a solo 401(k). There's The elective deferral, the catch-up contribution for those age 50 and older, and the employer nonelective contributions.
First, the elective deferral. You as a self-employed individual can defer up to up to 100% of earned income up to the annual contribution limit, which is $19,000 in 2019.
The catch-up contribution. If you're age 50 or over you can defer another $6,000 on top of the $19,000. That makes it $25,000.
The employer nonelective contribution. And then, as the employer, you can sock away up to 25% of earned income in the solo 401(k). Note: Earned income is defined as net earnings from self-employment after deducting both one-half of your self-employment tax, and contributions for yourself.
Total contributions to your solo 401(k) account, not counting catch-up contributions for those age 50 and over, cannot exceed $56,000. But if count catch-up contributions, the total you can contribute is $62,000.
Introducing TheStreet Courses! Financial titans, Jim Cramer and Robert Powell, are bringing their market savvy and investing strategies to you! Learn how to create tax-efficient income, avoid top mistakes, reduce risk and more! With our courses, you will have the tools and knowledge needed to achieve your financial goals. Learn more about TheStreet Courses here.