What You Need to Know About 401ks
Are you making the (mistaken) assumption that you can’t have a 401k because you’re a solopreneur?
Even if you’re just one person, you *can* have a 401k. It’s called a solo or self-employed 401k and is offered widely.
Key Differences between a 401k and an SEP
Now, there’s nothing wrong with the Self-Employed Pension IRA, aka SEP, but there are some important differences between it and a 401k.
While you can contribute up to $56,000 into either one, your SEP contribution is capped at about 25% of what you’ve paid yourself over the year or 20% of your net corporate income. So if you’ve been running lean or taking a small salary this year — and let’s be honest, many of us have thanks to COVID — your eligible contribution amount will be lower.
By contrast, the 401k allows you to contribute 100% of your pay (or K-1 payments for LLC owners) up to $19,500; plus an extra $6,000 catch-up if you’re 50 or older. Oh, and if you have profits, you can top your 401k up with profit sharing. So, in Q1 of next year, you can reward yourself with up an *additional* $37,000.
And don’t forget this: Your retirement contributions are tax-exempt. If you’re having a good year, why not pay yourself $56k instead of banking the money at a 20% or higher tax rate?
Read more about 401k versus SEP (https://www.nerdwallet.com/blog/investing/retirement-plans-self-employed/) to get a handle on important factors like costs, borrowing, and when and what you have to offer to employees.
Key Dates for Your Retirement Planning
If a 401k sounds good to you, this is the week to get started – see our checklist. The 401k carries a 30-day waiting period before you can make your first payroll deferral. That means next Friday, November 6, is effectively the last day to make a 401k happen. (If you decide on a SEP, you have more time. You can set up and fund until the day you file your 2019 taxes.)
You’ll need to consider included employees, administrative fees, and investment options. On such a tight timeframe, I recommend looking at Guideline or your existing broker.
And if the thought of doing all this makes you queasy, schedule a 15-minute Year End Strategy Session and I’ll walk you through it. Click here to book your spot.
And one final reminder: Please vote early or on Election Day. Elected officials up and down the ballot make decisions that directly and significantly impact your business and your family. And when contests are decided by just a few votes, yours REALLY matters. Find your polling place here.
Until next time!