Last year, I decided that it was time to get involved in a SEP-IRA. It only took about two years since my friend at RateLadder suggested the advantages of SEP-IRAs. It’s not so much that I was procrastinating, but that I needed my self-employment income to, well, buy stuff I needed.
While I knew about Solo 401ks, for some reason, I didn’t investigate them in detail. I think I perceived them as more difficult to get going. The other day I thought it might be time to revisit that situation. Here’s what I found.
About the Solo 401k
The Solo 401k is pretty much what you might expect… a 401K for self-employed individuals. In fact it’s often called an individual 401k. The idea is that you get the advantages of a 401k plan that regular employees do. Of course it’s not a pre-tax deduction do to the self-employment aspect of it (how would you withhold from a paycheck).
Why the Solo 401K seems right for me…
It all comes down to maximizing my tax deferrals. In 2010, the Solo 401K allows you to defer up to $16,500, plus 25% of my profits. The math is a little confusing and enough to make my head spin. So I’m going to link you to my friend Madison at MyDollarPlan’s analysis of Solo 401k Versus SEP-IRA. You’ll note that the Solo 401K allows for one to defer more money – significantly more money.
In theory one could defer $65,500 with the Solo 401k. However, I don’t make nearly enough money to make that happen. I’m hoping for a situation where I’m allowed to defer about $20,000. If I had to take a guess, I think that’s about where I would end up. At age 65 (31 years from now), that money should come in quite handy.
[Note: I’m not a tax guru, so these are mroe free-form thoughts. I will seek the advice of my tax advisor.]