A Retirement Plan for the Self-Employed: The Single 401(k)

There are many perks to being self-employed — flexible hours, the possibility of working from home and, of course, being your own boss. But one major downfall that has historically burdened solopreneurs is the lack of access to traditional employer-sponsored retirement plans, such as a 401(k).

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Because of this, paired with misconceptions that saving for retirement is too expensive, many freelancers and others in the gig economy are drastically undersaving for retirement. This is a mistake they can’t afford to make.

And with National Small Business Week coming next week, this is an opportune time to talk about one of the most attractive retirement savings options for the self-employed: the Single 401(k), also known as a Self-Employed 401(k), Individual 401(k) or Solo 401(k).

A Single 401(k) is a 401(k) retirement plan specifically designed for self-employed people or sole proprietors and, if applicable, their spouses.

It permits 100 percent employee salary deferral of up to $19,000 in 2019 if you are under 50; up to $25,000 if you are 50 or older. It also allows an employer profit-sharing contribution of up to $56,000 per year, letting you stash away extra savings by serving as both the employee and employer of your business.

Overall, this can save you more than $14,000 in taxes per year (assuming a $56,000 contribution and a 25.7% corporate tax rate), while simultaneously offering a loan provision in case you need to tap your savings.

Any person who is truly self-employed, whether as a full-time business venture or side hustle, can participate in a Single 401(k) plan. Your business qualifies whether it’s structured as a sole proprietorship, partnership or corporation, as long as there are no other employees or employees aren’t eligible to participate in a traditional 401(k). Examples of those: people who work fewer than 1,000 hours per year or are under 21.

For these reasons, the Single 401(k) can be a good option for husband/wife partnerships or small businesses that generally have only part-time employees. Examples: real estate agents, bookkeepers and personal trainers.

A Single 401(k) provides the flexibility to contribute as much as you want from year to year (within the standard limits). So in years when business is booming, you can save a lot; in lean years, a little.

Additional benefits include:

• Reduced taxable income for pre-tax salary contributions
• Ability to make after-tax Roth 401(k) contributions
• Built-in profit sharing for maximum savings deductible against business income
• Plan expenses that are deductible to the company
• Tax-deferred growth on investments
• Higher contribution limits than alternative retirement savings plans for the self-employed: SEP and SIMPLE IRAs

There’s often no cost to set up a Single 401(k) and there may or may not be annual maintenance fees (when charged, they can run between $20 a year and $25 a month). You’ll owe commissions for online trades.  But you won’t need to file annual reports with the Internal Revenue Service until the plan exceeds $250,000 in assets.

You typically need to make contributions by the end of the calendar year for them to count for that year, but employer contributions can be made until April 15 of the subsequent year.