One of the advantages of running your own business is being able to manage the money coming in and the expenses going out. But, unless your company has big capital expenses such as equipment, vehicles, computers and such, you may find yourself looking for ways to shield what your business earns from taxes. A 401K might be the solution.
Especially if you’re a service-based business, you should be looking at a self-employed 401K. While there are other options out there for the solopreneur and their partner spouses, this one in particular has some seriously high contribution limits which lowers your taxable income.
If you have worked for a company at one time and had a 401K, you may remember there were limits and maximums. This may feel like big company stuff, and a bit out of reach, but you may be surprised at how 401K’s have evolved.
Overhead cost is negligible, and you can often set these at no-cost with one of the big names like Fidelity or Charles Schwab. Imagine having a contribution limit as the employer (you) and as an employee (also you) that you can use to fatten up that retirement account? Now we’re talking tax savings and big benefits!
The business owner wears two hats in a 401(k) plan: employee and employer. Contributions can be made to the plan in both capacities. The owner can contribute both:
- Elective deferrals up to 100% of compensation (“earned income” in the case of a self-employed individual) up to the annual contribution limit:
- $20,500 in 2022 ($19,500 in 2020 and 2021), or if you are over the age of 50, $27,000 in 2022 ($26,000 in 2020 and 2021); plus
- Employer non-elective contributions up to:
- 25% of compensation as defined by the plan, or
- for self-employed individuals, things differ.
You’ll find a lot of choices out there, so it’s a good idea to do your own research, check out the IRS website, and be in touch with a reputable investment firm like one of those I mentioned. Or, if you are not sure what you need, and it’s all a bit overwhelming, set up an appointment for a free initial consultation. Together, we can help you navigate a path forward and make sure you are keeping more money in your pocket while investing for your future. Once we speak, and I have some details, I can refer you to an expert.
You have a lot of choices, and staying informed on details is what we do. While there’s a lot of things we should be doing like going to the gym, drinking less, and avoiding seconds at the dinner table, some things can’t wait – like making the most of what you earn.
Feel free to reach out and I’ll share with you the resources I’ve used to setup my own self-employed 401K.
Let the savings begin!
Tom
