Any time you can get more money into tax-advantaged accounts, like IRAs, 401ks, and HSAs, I say do it. I am always scheming for new ways to take advantage of these types of accounts because they’re awesome. The more you can contribute, the faster you will achieve financial independence. If you are self-employed, or even if you have just a little side income, you can get the best retirement account available: a “Solo 401k.”
Got A Side Hustle?
I love having income through a side-hustle, because it opens up so many options to reduce your taxes and upgrade your freedom. You can give yourself a juicy boost of financial freedom by opening a solo 401k. A solo 401k is like a regular 401k, but way more badass (hard to believe, right?).
What Is So Delicious About A Solo 401k?
Oh, if I could only count the reasons… so many! The most popular benefit is that you can contribute more money to tax-advantaged accounts. In fact, there is no other account that allows you to contribute so much each year!
Like a regular 401k, you can contribute $18,000 per year in 2017 ($24,000 if you’re over 50 years old). But, on top of that, you can also contribute a portion of your side-hustle’s profit. This is the equivalent of your employer matching contributions. You can contribute a portion of your profits (25% of profits for a husband-wife LLC or partnership or 20% of profits for a sole proprietorship or single member LLC)
Use Hindsight To Stash The Max
You can wait to contribute until after you have figured your taxes (before you file). That’s right, unlike regular 401ks, a solo 401k allows you to contribute for the prior year, up until the time that you file your taxes. This allows you to ensure that you can contribute the absolute most allowable – to stash the max. Since there is a profit component for solo 401ks, you usually need to wait until after the year is over to calculate your actual profit. There is no guessing about exactly how much you can contribute.
No Income Limits
Unlike traditional and Roth IRAs, the solo 401k has no income limits. You can have both traditional (deductible) and Roth accounts in your solo 401k too.
You can participate in more than one 401k plan at a time. That is, if you have a regular job with a 401k, you can participate in that, and you can also contribute to your solo 401k in the same year. Your individual contribution for all 401ks is limited to $18,000 for 2017, or $24,000 if you are over 50 years old.
So, if you’ve maxed out your 401k through your regular job, you can only contribute the profit portion into your solo 401k. But, that’s still up to $36,000 of contributions that you would otherwise not have been eligible to make without a solo 401k.
Even Your Spouse Has Benefits
Your spouse is good for something, right? Both you and your spouse can participate in your solo 401k plan, so long as you both have income attributed from your business or side hustle. The good news is that you get to decide how to attribute the business income between you and your spouse. If you do most of the work for your business, but your spouse helps out with a few aspects, like marketing, graphic design, bookeeping, etc, then you can attribute a reasonable portion of the business income to your spouse. The right attribution between you and your spouse may allow you to maximize your total 401k contributions for the total household, depending on your situation.
Achieve FI Sooner
The more money you can contribute into tax-advantaged accounts (IRAs, 401ks, etc), the sooner you will achieve financial independence (FI). There really are no better places for the vast majority of us to put our hard-earned money. The tax benefits over time are tremendous. The solo 401k is unique because it allows you much higher contribution limits, if you have the money.
You Can Always Get Money Out – Penalty Free
Some people are afraid to contribute to 401ks because they think they may need the money soon. But, so long as you have a basic Emergency Fund, you should not worry about this. The good news is that you can always get your money out penalty-free with just a little planning through a Roth Conversion Ladder. So, build your emergency fund for unplanned emergencies, and get everything else you can into your retirement accounts.
SEP IRA vs. Solo 401k
Small business owners (and side-hustlers) have another option available besides solo 401ks: the SEP IRA. Generally, I recommend solo 401ks over SEP IRAs for most hustlers, especially if your business makes less than $144,000 per individual owner. However, you may prefer an SEP IRA instead if:
- Both you and your spouse have access to a traditional 401k at work. If you both maximize your contributions to your employer’s 401k, then you may be able to contribute more through an SEP IRA in your side hustle, rather than a solo 401k.
- If you have employees who work more than 1,000 hours per year. In this case, you can’t contribute to a solo 401k at all, but you can still have an SEP IRA. Keep in mind that your spouse does not count as an employee.
Where Can You Get Started?
That’s it. Thanks for your time!