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What’s a Solo K and Why Would I Want One?

What’s a Solo K and Why Would I Want One?

March 27, 2023

It’s tax season, so some of you are winding up your taxes. If you are a business owner, you might be asking yourself, “how can I save more for retirement next year.” For solo- companies, and family-owned companies I like to recommend a Solo-K business retirement plan. This gives you all the features of a 401k at a VERY low cost. And, often, it allows the business owner to save more of the money her business generates each year.

Choosing the Right Retirement Plan for Your Business

Many small businesses start out using a Self-Employed Pension (SEP) IRA retirement plan. They are simple, easy, and cheap to set up. All contributions come from the employer since the plan is a profit-sharing plan in the eyes of the IRS. Once deposits are made, they are treated just like Traditional IRA money. The employee owns the account. Any distributions are taxed as income. Required distributions must begin the year that the owner turns 73 years old.

SEP IRA contributions are limited to the lesser of $66,000 or 25% of the business profit. Your business would need to make $264,000 in profit to max out. But it’s a great place to start particularly if you are a solo business.

But if you want to save more of your money, and if maybe a spouse works in your business, a Solo K business retirement plan can be an excellent choice. The annual contribution limit is $73,500 per participant. Of that, $30,000 can be deferred compensation and can be directed to a ROTH account ($22,500 for those under 50). The remaining $43,000 is a traditional profit-sharing contribution. Your business would need to show a profit of $172,000 after paying you $30,000. Your business needs to show $202,000 in profits and you can save $73,500, or 36%.

Maximizing Retirement Savings for Small Business Owners

The cost to set up a solo K and maintain the correct IRS forms and filings is often very low. A few hundred dollars each year. This is much cheaper than a full-blown 401k for a larger company. So, it can be a great tool to consider.

With either plan, if you have the income, you can do the same contribution for your spouse who participates in the business.

I always remind my business-owner clients that one of the goals of the business should be to provide for the family. Including providing retirement savings. So, a business retirement plan is a central part of running a small business.

Additionally, under the Setting Every Community Up for Retirement Enhancement (SECURE) Act, enacted on Dec. 20, 2019, small employers get a tax credit to offset the costs of starting a 401(k) plan or SIMPLE IRA with auto-enrollment. So, it’s that’s still more incentive.

Planning Ahead: Incorporating Retirement Goals into Your Business Strategy

If you would like to talk about your business retirement plan and how to maximize its value for your retirement fund, give me a call. I love talking with new folks. Just follow this LINK to find a time that works for you.

Yes, I am a CERTIFIED FINANCIAL PLANNER™ professional. I’m always a fiduciary and I work on a fee basis. And yes, I’m still taking on a few great families to be part of my financial planning practice. If you would like to talk about your financial goals, I would be honored to help you. Just follow this LINK to find a time that works for you.

If this article has you thinking about your own circumstances, contact my office at rdunn@dunncreekadvisors.com. I am always happy to meet with people who are working on their retirement plans. Dunncreek Advisors does not provide legal or tax advice, nor is this article intended to do so.