At The Money: How to Max Out Your Small Business Retirement Plan | At the Money
From At The Money
Dan LaRosa•Head of Corporate Retirement Planning, Ritholtz Wealth Management
Executive Summary
Small business owners primarily choose between a SEP IRA and a Solo 401k for retirement savings, with the Solo 401k often being more advantageous for those with lower-to-moderate incomes due to its contribution structure.
A Solo 401k allows for maximum contributions ($72,000 in this example) at a lower income threshold (approx.
$240k) compared to a SEP IRA, which requires a much higher income (approx.
$360k) to reach the same limit.
Individuals with a side business can establish a separate retirement plan, enabling them to contribute up to an additional $72,000 on top of their primary employer's plan, as the overall limit applies per plan.
Solo 401ks come with a critical compliance requirement: filing Form 5500-EZ once plan assets exceed $250,000, with severe penalties for failure to file ($250/day up to $150,000).
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Concerns Raised
The complexity of retirement plan rules can lead to suboptimal choices, like defaulting to a SEP IRA.
The severe financial penalties ($250/day up to $150,000) for failing to file Form 5500-EZ for a Solo 401k.
The common misconception that Solo 401ks have the same robust ERISA creditor protection as corporate 401ks.
Adding employees to a business can become expensive quickly under both SEP and Solo 401k contribution rules.
Opportunities Identified
Utilizing a Solo 401k to contribute the maximum amount ($72,000) with a lower net income than required by a SEP IRA.
Establishing a separate retirement plan for a side hustle to contribute an additional $72,000 on top of a primary W-2 job's 401k.
Using a mega backdoor Roth feature in a Solo 401k to contribute up to $72,000 in post-tax dollars with only $72,000 of income.
Supercharging household savings by adding a spouse as a legitimate employee to the Solo 401k plan.