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Solo 401(K) – Tax Savings and Investment Freedom!

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Solo 401(K) – Tax Savings and Investment Freedom!

What Is a Solo 401(k)?

You may be familiar with term 401(k), as we previously discussed.  These plans became available in 1981 as a way for companies to help provide for their employees’ retirement.  A traditional 401(k) is an employer-sponsored plan that gives employees a choice of investment options.  Employee contributions, and any earnings from the investments can provide immediate tax savings, as are the income taxes on any matching funds, until savings are withdrawn.  (An exception to this, some plans now permit contributions on an after-tax basis, Roth 401(k)s, and these amounts are generally tax-free when withdrawn.) 401(k) plans are a type of retirement plan known as a qualified plan, which means the plan is governed by the regulations stipulated in the Employee Retirement Income Security Act of 1974 (or ERISA) and the tax code.

Typically, plan contributions utilize a variety of traditional investment vehicles, things like mutual funds, stocks, and bonds.  Rarely will you see a company-sponsored plan that allows for purchase of Bitcoin or other non-traditional investments.  But, as a single-employee business owner, if you are interested in using cryptocurrency as part of your retirement portfolio, there is a way.  It’s called a Solo 401(k) plan.  A Solo 401(k) allows more variety in investment choices and provides for larger annual contributions than other options like a self-directed IRA LLC or a custodial IRA.

Solo 401(k) plans were designed for self-employed people with no full-time employees (except your spouse).  Just like traditional 401(k) plans, these can be set up in before-tax or after-tax configurations (traditional or Roth respectively).  And yes, if you choose a self-directed Solo 401(k) Plan, you can typically invest in cryptocurrency, precious metals, real estate, and a variety of other investments for your retirement years.  These details are outlined in your plan documents and your plan adoption agreement.

The maximum annual contribution limit to a Solo 401(k) is $18,500.  But, remember, a 401(k) allows for a business to make profit-sharing contributions to an employee’s account.  This may entitle you, as both employer and employee, to additional contributions bringing your total up to $55,000 for the year if you are under the age of 50, and $61,000 if you are 50 or older.  Please see IRS Section 415( c), or talk to your tax professional, for more detail on how to calculate your allowable contributions.

Why Go Solo?

You get to choose what you invest in for your retirement.  You don’t have to get permission if you want to buy Bitcoin, gold bullion, or shares of the hot new stock!  If your investments tank, you also have no one but yourself to blame!

Your Solo 401(k) contributions may be protected against creditors in case of bankruptcy.  State laws vary, but consideration is given to retirement accounts.

You can borrow against the value of your Solo 401(k) account.  You must repay the loan within five years along with a reasonable rate of interest, and your plan must be configured to allow for this feature upon inception.

You can invest in your business.  You can invest in real estate.  Make sure you understand the IRS rulings governing such investments before moving any money around.

Get Good Advice

These accounts are beneficial, but have many details and IRS rules surrounding them.  Make sure you work with an experienced tax professional when creating and operating your Solo 401(k) so you cover your bases.  Also keep in mind, as will all retirement plans, funds withdrawn before you reach age 59 ½ carry substantial early withdrawal penalties.

As a small business owner, understanding your financial position today, and tomorrow, is what keeps your business thriving and your future strong.  Retirement planning is one important part of that.  Making sure today’s financials are as they should be, allows for those retirement investments!  Regular review of balance sheets, profit and loss statements and understanding your cash-flow, keeps you at the top of your game.  Talk to your accountant to make sure your financial practices and tax strategies are at their best, to keep you at yours.

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