hi this is Brad Rosley welcome to this week's version of smart money today
we're going to talk about self-employed also known as solo 401k as a name
implies these these are good for people that are self-employed with the
exception of being able to include your spouse if he or she works in the same
business so these are not for people that have w2 full-time employees years
ago I started my own business I start off with what's called a SEP IRA SCP IRA
as many self-employed people are familiar with in the SEP IRA you're
allowed to save a percentage of your income from the employers standpoint
into a retirement plan and these are nice plans several years back a new
option came across my desk that I jumped on and it's called this solo or
individual 401k first thing I liked about it as most people will is that
there's no cost to set it up or at least very little cost if any so you can set
up this program unlike a traditional 401k that many people are familiar with
at larger companies those plans have a lot of expenses that are charged back to
the employer kind of behind the scenes those expenses make it unattractive for
a smaller employer to set up before 1k but with the solo 401k there's virtually
no expenses at all there are also set up through brokerage
companies you can invest your solo 401k money in stocks bonds mutual funds
exchange-traded funds CDs money markets you name it so they're very flexible on
allowing you to create your investment portfolio let's suit your needs the real
exciting part though is the amount of money you can invest in these programs
the amount is a percentage of what you make is really extraordinarily unlike a
SEP which is 20 or 25 percent of your income the solo 401k as the name implies
allows you to put away on a salary deferral a 401k contribution dollar for
dollar up to the first $18,000 of urine for example with a SEP IRA if you could
put away 25% of your income times let's just say you had a side job and made 10
grand 25% of that is obviously 2500 bucks
however if you had a solo for 1k you could put away all $10,000 of that
income all tax-deductible the 401k contribution limit for 2017 is $18,000
so you could put away your first 18 grand tax deductable in your salary
deferral if you happen to be over 50 you'll get the opportunity to put away
another 5 grand and call it a catch-up contribution that brings your 401k
contribution up to $24,000 a year and it's only going to go up in addition to
that you still get to make that SEP IRA contribution or the 20 or 25% depending
on whether or not you're an S corporation or e a sole proprietorship
so let's take a couple examples they'll put them on the screen here next to me
let's say you made $50,000 this year as your net income well if you're under 50
you get away you get the opportunity to put away 18 grand in the 401k plus
another 25% 25% of 50,000 is 12,500 so you get to put away 18,000 plus 12 5 or
just thirty thousand five hundred dollars tax deductable of your $50,000
income that's sixty percent of your income if you happen to be over age 50
and another six grand on that at the catch-up contribution which is 24
thousand now for their 401k plus a 12 five or a total of 36 five that's a lot
of money 36 five are your 50 grand you're not
paying income tax on that saves you a boatload in FICA and income tax I'll do
one more example let's say you made a hundred and fifty thousand dollars this
year the same 401k contribution eighteen thousand if you're under age 50 or up to
twenty four thousand dollars if you're 50 year older plus the 25 percent if you
have an S corp that you can put away into the SAP 25
percent times 150,000 along with the cap on this plan is $60,000 total you're
allowed to put in $60,000 and if you have a in income of $150,000 or more in
your solo 401k if you make I'm sorry if you're under age 50 your cap is at fifty
four thousand so that's where you'd be either case it's a lot of money as a
percentage of your income what happens if you don't have that kind of money you
don't have to make any contribution you have a slow year or you don't have the
funds available don't make a contribution here is a good year go
ahead and make a contribution it's very flexible that way that's a very nice
thing as a small business owner a lot of times their cash flow might jump up and
down year to year three other things the factor one is you can make a Roth 401k
contribution meaning you're using after-tax money and the money comes out
tax-free that's an option you can choose to do with or without or for some of
your contribution but not all on the employee side the employer contribution
is always tax deductible only second thing you want to consider there's a
1231 deadline to set the plan up you have to have all the documents in before
the end of the calendar year the good news is the deadline to make a
contribution is not until April 15th of that year I should say on the file in
here your texture so have the plan set up by 1231 and then you have to April
15th of the following year to make your contribution in any case always always
always check with your tax preparer to make sure you're following the rules and
guidelines I've written about this in a blog post I have this in other videos
available on our YouTube channel so please check them out and subscribe to
both of them so you'll stay in the loop and get future posts when they come out
thanks for listening have a great day