What’s A Solo 401k And How Can Side Hustlers Use It?

In today’s economy, most Americans are looking into gigs that can support their lifestyles, their finances and overall income. You could be working for Uber or DoorDash, posting product reviews on YouTube or being an Airbnb host.

You may already receive tax deductions on this extra income. And with a Solo 401k, you can benefit from reduced tax liability on top of it.

What is a Solo 401k?

A Solo 401k, also called self-employed or individual 401k, is a unique tax-advantaged account similar to SEP-IRA or Simple IRA. Side hustlers and self-employed people can open a Solo 401(k) retirement plan.

Solo 401k are unlike the two traditional types of retirement accounts, namely Roth IRA and company-sponsored 401k plans. Anyone over the age of 18 with an earned income, can open a Roth IRA where you can contribute up to 6,000 a year. If you are 50 or older, the upper limit for annual contribution is $7,000.

For the traditional 401k, the company has to match the employee contribution. After you retire, you can then make tax-free withdrawals from most retirement plans.

In contrast, independent contractors with a Solo 401k plan are both the boss and employee.

Benefits of a Solo 401k plan

Here are the fantastic advantages of the Solo 401k:

Get tax-free loans: Besides receiving considerable tax deductions, borrowing half of the value in your account or up to $50,000.

Invest in anything: Make any investment, such as a real estate purchase, unless your account is at a bank.

Contribute higher amounts: You can make higher annual contributions - the maximum limit is $63,500 if you are 50 or older.

Get better asset protection: Solo 401k plans have stronger creditor protection than traditional retirement plans in the case of bankruptcy.

Operate efficiently: You don’t have to establish an LLC since you are the sole decision-maker. Furthermore, there is annual no-tax filing if the value of your assets is not more than $250,000.

How to open your Solo 401k plan?

If you own a business with no employees or are a freelancer, you can set up a Solo 401k account. People facing adverse financial situations like layoffs, reduced work hours or a closed business also qualify.

Setting up an account to enjoy tax deductions on your side hustle is not complicated. You can go through a corporation, online broker or Solo 401k provider to get started. First, you need to apply for an EIN (Employer Identification Number.)

Next, sign the adoption and account opening agreements to make a contribution. You then need to establish the Solo 401k plan before December 31 to invest this calendar year. You may have to fill out some additional paperwork required by the IRS and make profit-sharing contributions before filing your taxes.

One more advantage of the Solo 401k retirement plan is that your spouse can also contribute. Although there is a no-employees rule, your spouse is an exception if they earn money from the business.

Need help implementing this process & or signing up? Contact Core today! 

Maximize your tax deductions by exploring side hustles

One in three U.S. Americans are self-employed in this “gig” economy. You can maximize your deductions by exploring side hustles like blogging, selling handmade products, drop-ship gigs or online tutoring etc. There are plenty of options to maximize and create growth. Core can help with this. 

 Call Core Wealth Management to know how to increase your tax deductions with a Solo 401k.