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401(k)s

How Much Can You Contribute to a Solo 401(k) for 2019?

Some self-employed savers can put away as much as $62,000 for retirement in a solo 401(k) in 2019, depending on age and compensation.

A solo 401(k), also known as an individual 401(k) or a one-participant 401(k), is designed for self-employed people who have no employees other than a spouse. The plan allows these small-business owners to salt away much more for retirement than they could stash in a traditional IRA or even a SEP IRA -- another generous retirement plan designed for the self-employed -- while avoiding the expense and paperwork of setting up a full traditional 401(k) plan.

Solo 401(k) Contribution Limits for 2019

The maximum amount a self-employed individual can contribute to a solo 401(k) for 2019 is $56,000 if he or she is younger than age 50. Individuals 50 and older can add an extra $6,000 per year in "catch-up" contributions, bringing the total to $62,000. (Amounts are higher for 2020.) Whether you're permitted to contribute the maximum, though, will be determined by your self-employment income.

You are allowed to sock away so much because you can make contributions as both an employee and an employer, though each type of contribution to a solo 401(k) has its own IRS rules.

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For instance, you can contribute up to $19,000 for 2019 as an employee (or $25,000 if you're 50 or older), even if that is 100% of your self-employed earnings for the year. Contributions are made on a pre-tax basis, although some solo 401(k) providers also offer a Roth 401(k) option that allows you to invest some or all of your contributions on an after-tax basis. Pre-tax contributions and their earnings will be taxed as regular income when withdrawn in retirement; Roth contributions will be tax-free in retirement.

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In addition, you effectively can contribute up to 20% of your net self-employment income as an employer (your business income minus half your self-employment tax), though those contributions must be made with pre-tax dollars. These pre-tax contributions lower your taxable income and help cut your tax bill.

To set up a solo 401(k), you just complete an application to open one with a financial institution, says Todd Youngdahl, a certified financial planner in Falls Church, Va. Most large investment firms have such accounts available for business owners, he says. Youngdahl recommends Fidelity because it does not charge a fee to open a solo 401(k), nor does it charge annual plan fees. You can invest the money in mutual funds, certificates of deposit or other investments offered by the plan provider.

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Employee contributions generally must be made by the end of the calendar year, but you have until the tax-filing deadline to make employer contributions.

A solo 401(k) can help you build a sizable nest egg. Say a 30-year-old contributes $10,000 a year to a solo 401(k) and has an annual return of 6%. By age 65, he or she will have contributed $350,000, but the nest egg will have grown to nearly $1.2 million.

Though a solo 401(k) takes little paperwork to set up, you should be aware that once your plan exceeds $250,000 in assets, you must file Form 5500 with the IRS every year, according to Jim Shagawat, a certified financial planner in Paramus, N.J.

Who Should Invest in a Solo 401(k)?

Mark Beaver, a certified financial planner in Dublin, Ohio, says a solo 401(k) can be a very good option for someone who has self-employment income and is trying to maximize their pre-tax retirement savings.

It's also a good savings option for someone who works for a company that has a 401(k) plan but who also does contract work on the side, says Scott Frank, a certified financial planner in Encinitas, Calif.

Just keep in mind that 401(k) contribution limits apply per person, not per plan. If your solo 401(k) is for a side job, and you're also participating in a 401(k) at your day job, the contribution limits apply across all plans, not each individual plan.

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