When you are a small business owner, every penny counts. You are careful about where your money goes and you want to keep as much of it in your own pocket as possible. This is why a solo 401k plan is becoming more and more popular with self-employed individuals. It allows them to use the solo 401k contribution limits to save much more toward their retirement than other types of retirement accounts.
The contribution limits of an individual 401k is the primary reason why small business owners choose a 401k over an IRA or other type of retirement plan, but only self-employed individuals who have no full-time employees other than their spouse can take advantage of this kind of account. So, if you have employees, you aren’t eligible to participate, but if you don’t, here is why the contribution limits of a 401k plan can help you meet your financial goals.
The Solo 401k Contribution Limits Much Higher:
This subtitle says it all. People who have 401k plans are able to save a lot more toward their retirement than those who have other types of plans. In 2014, an employee can contribute as much as $17,500 to a 401k account. That same employee can only contribute $5,500 to an IRA. Employers can contribute up to 25 percent of an employee’s annual salary to the account in either case, but with an IRA, the employee is leaving $12,000 on the table by choosing an IRA over a 401k.
The other important factor involving solo 401k contribution limits is that your spouse can also contribute the maximum amount to his or her own 401k account. This doubles the amount you, as a couple, are saving for retirement at a much higher rate than with an IRA. Since an individual 401k plan is only available to small business owners and their spouses, this plan makes the most sense for couples who run their own companies and intend to retire together.
The best way to use a solo 401k plan is if both you and your spouse earn enough to make the maximum contributions of $17,500 for an employee and 25 percent of an employee’s salary up to $52,000. By meeting both maximums, you will have increased your retirement savings significantly over what you could have saved using an IRA. However, even if you don’t earn enough to meet these maximums, a 401k plan still allows you to save more money than other types of retirement accounts.
Retirement Savings Acceleration:
The end result of the higher solo 401k contribution limits is that you can greatly accelerate your retirement savings. If you haven’t been saving for retirement up until you owned your own business, these limits can help you get closer to your goals. Or, if you have been saving since you first started working, contributing to a 401k plan can help you meet your goals sooner or enable you to exceed your goals and have an even better financial situation when you do retire.
Of course, if you are not eligible to have a solo 401k plan because your small business has full time employees, you still need to take advantage of an IRA plan to make sure you do have some retirement savings, even if you aren’t able to save as much as you could with a 401k. Having any retirement plan is better than not having one at all, so don’t make the mistake of thinking that because you don’t qualify for an individual 401k plan that you shouldn’t have any type of retirement account. If you think like this, you could end up working for the rest of your life.
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