4 Benefits of a Solo 401(k) for Self-Employed People

Most employees consider their 401(k) account a vital benefit. Employers offer these plans to encourage retention and help their employees save for retirement.

In contrast, self-employment also offers many advantages, like the freedom to manage your own business. Of course, self-employed people don't have an employer to provide them with these types of financial perks. Still, being a business owner and working for yourself does not mean you have to lose the financial benefits of a 401(k) plan.

For instance, did you know that you could use income from self-employment to establish a Solo 401(k) plan? These accounts can help you save for retirement by offering a tax-advantaged way to invest for retirement, just like an employer-based 401(k). In addition, a self-directed Solo 401(k) offers investors the chance to choose diverse assets that they won't find at a bank or brokerage.

Four Important Benefits of a Solo 401(k)

A Solo 401(k)'s generous contribution limits, flexible rules, and tax benefits offer you a chance to take control over your retirement. To understand what this powerful savings tool can do for you, explore four outstanding benefits of a Solo 401(k).

1. You Can Borrow Money From Yourself

Financial advisors may caution people against borrowing from retirement contributions. In a perfect world, it's often best to leave retirement funds alone, so they can grow and compound earnings over time. At the same time, few of you live in a perfect world.

Most folks face unexpected financial challenges and sometimes, economic opportunities at some point in their lives. For instance, you might need to pay for urgent medical care, decide to buy a new home, or need extra funding for your business. These experiences might encourage you to contribute less to your retirement plan because you want to set aside liquid savings.

With a Solo 401(k), you can invest with confidence. As some people like to say, you could become your own rich uncle by contributing as much as possible to your retirement account. Since you can borrow from your account, you can always handle an unexpected bill or fund a new venture. The ability to borrow from your account gives you a chance to invest more aggressively in your retirement. That’s because you know you have a backup funding source when you need it.

2. You Don't Need an IRA Custodian

Even with a self-directed IRA, you generally require a custodian to oversee how you can use your account. The ability to act as your own account custodian stands out as one of the primary benefits of a Solo 401(k) over other types of a tax-advantaged retirement plan.

Since you don't need a custodian, you also won't have to pay any custodial fees or deal with complex paperwork just to use your assets. You get to manage your own money, and you can save money and spare yourself from hassles in the process.

3. You Can Enjoy Greater Savings and More Tax Advantages

A Solo 401(k) should appeal to self-employed people who want to save more each year than a typical IRA allows. According to IRS.gov:

• A sole proprietor can contribute up to $66,000 in 2023. These high limits allow business owners to enjoy a substantial retirement account and generous tax deductions.
• In addition, the rules allow for a business profit-sharing contribution. As with an employee-sponsored 401(k), the business can help grow your retirement savings.
• You can make an additional $6,500 catchup contribution starting at age 50. After the kids leave home or you have paid off your mortgage, you might free up more funds for retirement.
• You can choose to create a Roth 401(k), which uses after-tax dollars but allows withdrawals with no tax consequences. Sadly, a SEP IRA does not have a Roth version, so you must use pre-tax dollars and pay taxes on your withdrawals.

The substantial tax savings of a Solo 401(k) will let your income stretch further when it comes to saving for retirement and other financial goals. If you choose a traditional 401(k), you can deduct contributions for the year you make them. If you choose a Roth IRA, you'll enjoy the luxury of tax-free withdrawals.

4. You Can Invest in Almost Anything

Traditional equities, CDs, and other products offered by banks and brokerages may not appeal to all investors. Even if some investors want to allocate some of their investments to equities or bank products, alternative investments give them a way to balance their portfolios against changing market conditions.

The flexibility and freedom of plan contributions for a self-directed, Solo 401(k) should particularly appeal to business people who already understand how to earn money from their assets. Even better, making these investments can be as simple as writing a check. A few examples of permitted investments in a self-directed IRA include precious metals, cryptocurrency, real estate, farms, and even local businesses.

The Best Place to Start a Solo 401(k)

It's never too early to start putting the emphasis on financial planning that it deserves. Make sure you're reviewing your retirement and will be set up well for the future.

If you need help now, Rocket Dollar offers guidance, flexibility, low fees, and a chance for self-employed people to take control of their retirement. Rocket Dollar also opens the door to investment opportunities that you might think only extremely wealthy people have access to. Find out more, or start setting up your self-directed Solo 401(k) today.