3 Reasons For Business Owners To Open A Solo 401(k) Before Year End

If you are self-employed or own a business and are annoyed by how much you pay in taxes, you should check out the Solo 401(k). While saving for retirement may not be top of mind for those who love what they do, paying fewer taxes helps you keep more of your hard-earned money. Keep reading to see if now is the time for you to open a Solo 401(k) plan for your business.

This time of year, I’ve been speaking with quite a few business owners who are setting revenue and income records for their businesses. Several of them just filed their 2022 taxes and are freaking out about what their tax bills for 2023 will look like. One of the easiest ways to reduce their tax bills is to pay themselves first and fully fund a Solo 401(k) plan.

3 Most Valuable Benefits To A Solo 401(k) Plan For Business Owners

1. How A Solo 401(k) Lowers Your Taxes

You’ve been busy building your business, which means you probably haven’t spent much time planning for retirement. Or, perhaps you have been killing yourself by working day and night so you can retire as soon as possible. Either way, a Solo 401(k) can help you reduce your current tax bills. If it wasn’t obvious, paying fewer taxes as a business owner will make it easier to retire ASAP.

The Solo 401(k) often provides the most significant tax savings versus a traditional IRA or SEP-IRA. For 2023, you could potentially contribute $66,000 pre-tax into your Solo 401(k). This number jumps to $73,500 if you are age 50 or older.

2. Easier To Set Up Than Traditional 401(k)

Solo 401(k) plans are best for businesses with no employees besides the company’s owners (and their spouses). This limitation allows for much more flexibility in setting up and running your Solo 401(k) compared to a traditional 401(k).

Keep in mind that once you begin hiring employees who are less than five percent owners, you will be required to switch to a traditional 401(k) and all the regulations and limits that come with these plans. It is still a valuable tax-planning strategy, but it is more costly and burdensome.

3. Reach Financial Freedom Faster

Financial freedom is the day work becomes an option. Reaching financial freedom is a huge accomplishment and helps reduce the stress of running a business or living life. A Solo 401(k) can help you achieve financial freedom faster by reducing the tax drag on your portfolio and income. The more you contribute to your accounts today, the more compounding interest can help you become a 401(k) millionaire.

Extra Tax Savings – Add A Cash Balance Plan

If you already max out your 401(k) contributions or $73,500 is less than 10% of your income, you might consider adding a Defined Benefits Pension Plan to your tax-planning strategy for potentially even more tax deferral. I recently set up a Cash Balance Plan for a new client; he was able to contribute over $400,000 to his family’s account above and beyond their Solo 401(k)s. This retirement plan will likely save him over $2 million in taxes over the next decade, potentially more, if his income or tax brackets increase during that time frame.

Being in business for yourself means you’ve chosen to live your own way and on your own terms. Taking advantage of Solo 401(k) benefits can see to it that you can retire your way and on your terms, too. See how quickly the tax savings can help you reach financial freedom faster and easier.

Your 2023 contributions will be limited if you haven’t opened your Solo 401(k) plan before year end.