Solo Practitioner and Wish To Save More Pre-Tax?
A Solo 401k can be a very helpful retirement account registration for you. The reason is simple…
Combine Elective Deferral + Profit Sharing = Total Contribution
- Under 50 years old: max contribution is $18,000 (elective deferral) + 35,000 (profit sharing) = $53,000 (total contribution)
- 50 years or older: max contribution is $24,000 (elective deferral) + 35,000 (profit sharing) = $59,000 (total contribution)
Q Why is this better than a SEP IRA?
A A SEP IRA only allows a contribution of up to 25% of net income.
Let’s look at an example:
Solo practitioner, Phil, is a successful freelance software programmer with the following situation and objectives:
- 35 years old
- $140,000 annual net income
- lower income taxes
- save as much as possible in a retirement plan
- flexibility to choose investments in retirement plan
- low administration cost retirement plan
| Investment Vehicle | Elective Deferral | Profit Sharing | Total Contribution |
|---|---|---|---|
| Solo 401k | $18,000 | $35,000 ($140,000 * 25%) | $53,000 |
| SEP IRA | $0 (not allowed) | $35,000 ($140,000 * 25%) | $35,000 |
A whopping $18,000 more!
If Phil was 50 years old or more that differential would increase by the elective deferral catch-up of $6,000 to $24,000!
The tax savings assuming an Federal effective tax rate of 25% would $13,250 investing for Phil’s retirement instead of being paid to the government…that’s $4,500 more in tax savings than a SEP IRA.
As is the case most of the time in investing and taxes, there are details to be aware of and follow. Contact us to setup a meeting.