Give Yourself the Gift of Financial Confidence with an Individual 401(k)

The holiday season can be a particularly stressful time for the self-employed. In addition to maximizing end-of-year sales, solopreneurs are focused on finalizing projects, issuing and paying invoices, closing books and preparing for tax season – all on their own.

Therefore, it’s no wonder the year-end deadline to set up an Individual 401(k) is often overlooked, but even as your year-end to-do list grows, there are compelling reasons to put establishing your plan at the top of it. Individual 401(k)s, which allow you to contribute up to $54,000 of tax-deferred income each year, have the potential to boost your bottom line and financial peace of mind, and could even move you into a lower tax bracket. 

Companies that operate on a calendar year have until December 31 to set up a 401(k) (though many providers may require you to complete the setup a few days in advance), and you’ll have until your tax deadline to make contributions to lower your 2017 taxes and build your retirement nest egg at the same time.

Unfortunately, many business owners don’t know they have access to these tax and retirement planning benefits. In fact, Spark 401k’s Small Business Retirement Planning Index found most (67 percent) small business owners, including solopreneurs, think their business is too small to access a 401(k) plan. In reality, any size business is eligible, and Individual 401(k)s can be managed for as little as $15 a month. Read on to learn why an Individual 401(k) may be the right choice for your financial future.

You get to pay yourself twice with a 401(k)

IRAs are one method small business owners use to fund retirement, but they offer a much lower contribution limit. IRAs allow you to contribute $5,500 (or $6,500 if you’re 50 or older) per year, compared to $54,000 in tax-deferred income per year with an Individual 401(k) ($60,000 if you’re 50 or older). This can have a significant impact on your retirement, and your taxes – potentially benefiting you on two levels.

To reach that $54,000, solopreneurs can profit-share – meaning the employer (you) pays the employee (also you!) a percentage of annual profit. LLCs can profit-share up to 20 percent of net schedule C; and C and S corps can profit-share up to 25 percent of W-2 compensation. You can also make personal contributions as an employee of up to $18,000 ($24,000 if you’re over 50) to help reach the maximum contribution amount. Remember, in 2018 employee contribution limits will increase to $18,500 ($24,500 if you’re over 50).

You can support spouses and co-owners

If your business has multiple owners or a spouse derives income from the business, they can also access these benefits. But once you hire additional employees, you’ll have to rollover your plan to an employee-based 401(k) plan design.

By working for yourself, you’ve made the decision to leave behind many parts of corporate life, but a retirement plan shouldn’t be one of them. If you want to begin 2018 on stronger financial footing, now is the time to act.

Advisory services are provided by Capital One Advisors, LLC, an SEC-registered investment advisor and a subsidiary of Capital One Financial Corporation.

Spark 401k is a marketing name for Capital One Advisors, LLC.