What is a Solo 401K?

A Solo 401(k), also known as an Individual 401(k) or Self-Employed 401(k), is a retirement savings plan designed for self-employed individuals or small business owners without employees (except a spouse). This unique retirement account offers significant tax advantages and flexibility, allowing individuals to save for retirement while maximizing contributions and investment options.

How Does It Work?

Unlike traditional 401(k) plans offered by larger companies, Solo 401(k)s are tailored for self-employed individuals and small business owners. With a Solo 401(k), eligible participants can make contributions as both the employer and the employee, enabling them to save more for retirement compared to other retirement plans.

Key Features

• Higher Contribution Limits: Solo 401Ks allow for substantial contributions, making them an attractive option for individuals looking to maximize their retirement savings. Participants can contribute as both the employer and the employee, potentially contributing up to $58,000 (as of 2021) annually, or $64,500 for those aged 50 and older through catch-up contributions.

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• Flexible Investment Options: Solo 401Ks offer a wide range of investment options, including stocks, bonds, mutual funds, exchange-traded funds (ETFs), real estate, and more. This flexibility allows participants to tailor their investment strategy according to their risk tolerance, financial goals, and preferences.

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• Tax Advantages: Contributions to a Solo 401K are typically tax-deductible, reducing participants' taxable income for the year in which contributions are made. Additionally, earnings within the account grow tax-deferred until withdrawal, potentially allowing for significant tax savings over time.

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• Roth Option: Imagine IRA's Solo 401K plans offer a Roth sub-account, allowing participants to make after-tax contributions. While Roth contributions are not tax-deductible, qualified withdrawals, including earnings, are tax-free, providing tax-free income in retirement.

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• Loan Option: Imagine IRA's Solo 401Ks offer participants the ability to take out multiple loans from their retirement savings, providing access to funds for various purposes such as home purchases, education expenses, or debt consolidation.