6 Commonly Overlooked Ways a Solo 401(k) Can Boost Retirement Planning

Self-employed workers give up access to an employer-sponsored 401(k). But if you are working for yourself, a solo 401(k) allows you to tap into a tax-advantaged retirement savings account with high contribution limits.

Here are some secrets about a solo 401(k) — including what it is and how it works — that can help you use one of these accounts to get ahead financially and save money on taxes.

A solo 401(k) — sometimes called a one-participant 401(k) — is a type of tax-advantaged retirement account available to small-business owners with no employees, the small-business owner's spouse, and self-employed individuals.

Small-business owners include sole proprietors and those who have established limited liability companies, S corporations, C corporations, and partnerships. The key is that you don't have any employees aside from yourself and possibly your spouse.

Here are the ways a solo 401(k) can save you money on taxes.

With a traditional solo 401(k), you typically make pre-tax contributions. That means you can lower your taxable income during the year you make the contribution.

If you opt to open a Roth solo 401(k), your contributions will not be tax-deductible. However, just as with a Roth IRA, the growth of the money and any withdrawals will be tax-free.

A solo 401(k) offers the opportunity to tuck away more money for retirement than you would be able to contribute if you had a typical 401(k) with an employer.

In 2024, you can contribute $23,000 to a solo 401(k) as an employee. However, you can also contribute another 25% of your compensation as the employer.

In addition, those who are 50 and older can make an additional $7,500 in catch-up contributions.

All told, you can contribute up to $69,000 in total if you are under 50, or $76,500 if you are 50 or older.

Some providers offer access to a Roth solo 401(k). With a Roth solo 401(k), you make contributions to the account with after-tax dollars. This is similar to how you make contributions to a Roth IRA.

The benefit with the Roth version of the solo 401(k) is that withdrawals from the account are tax-free if you are at least 59.5 years old and the funds have been in the account for at least five years.

If you need to tap into retirement funds early, some plans allow you to take out a loan from your solo 401(k). The loan can give you access to cash without having to pay taxes and an early withdrawal penalty.

Of course, you have to pay the money back. And during the period that the money is not in the account, it won't grow to provide for your retirement.

Some solo 401(k) plans might allow you to build an investment portfolio with alternative assets.

In addition to standard stocks and bonds, you might be able to use the solo 401(k) to purchase alternative investments such as real estate or precious metals.

The rules for solo 401(k) plan participants can be different from those for traditional 401(k) plan participants.

For example, as your solo 401(k) balance grows, you might be required to file a specialized tax form. For balances above $250,000, you must file form 5500-EZ.

In addition, unlike with a traditional 401(k), funds in a solo 401(k) typically do not fall under the creditor protections offered by the Employee Retirement Income Security Act of 1974.

It is important to be aware of and understand all rules that apply to solo 401(k) plans.

A solo 401(k) offers a way for savvy business owners and other self-employed individuals to save for retirement while trimming their tax bills.

Not only can this type of account help you build wealth for retirement, but you might also be able to lower your taxable income if you make sizable contributions to your solo 401(k).