Maximize Your Retirement: Investing In 401(K) As An Independent Contractor

If you are an independent contractor, you can invest in a Solo 401(k), which is a one-participant 401(k) plan. This is designed for sole proprietors, freelancers, and contractors and can help self-employed people maximise their retirement benefits. You can make contributions according to each title, as a business wearing the hat of both employer and employee.

Solo 401(k) overview

A Solo 401(k) is a retirement plan designed for sole proprietors, freelancers, and contractors. It is also known as an Owner Only 401(k) Plan or Individual 401(k). It allows self-employed people to maximize their retirement benefits.

As an independent contractor, you can recognize yourself as a business that wears the hat of both employer and employee. As an employer, you can contribute up to 25% of your compensation in 2022. As an employee, you can make a $23,500 employee contribution along with an employer contribution of 25% of your net income. For people who are 50 or more, the maximum employee contribution rises to $31,000 in 2025.

You can open a Solo 401(k) in a couple of ways. With a regular 401(k) deferral, the benefit comes from reducing your taxable income for the year since your income is deferred into the plan. As an investor, you can get an immediate tax deduction on your contributions. You’ll pay income taxes on those contributions in your later years as you start making withdrawals in your retirement. This tax-deferred plan may benefit those who will most likely anticipate falling into a lower tax bracket during their retirement years.

For those who anticipate being in a higher retirement tax bracket, the Roth 401(k) provides an alternative tax advantage. The Roth 401(k) allows you to contribute after-tax dollars to your retirement account. You don't pay taxes on the money when you withdraw it in retirement.

To open a Solo 401(k), you will need to establish a bank checking account where you will deposit your contributions and income generated from investments. This is also the account you will use to make investments and pay investment expenses. The intention of this account is to save for retirement. Funds should be kept separate from personal and business accounts. This ensures that the account is not used for personal gains.

A good Solo 401(k) company can provide a record-keeping system to account for the different types of contributions you will be making along with the investments made from those contributions.

Opening a Solo 401(k)

A Solo 401(k) is a retirement plan designed for sole proprietors, freelancers, and contractors. It allows self-employed individuals to maximize their retirement benefits by making contributions as both an employer and an employee. Here's a step-by-step guide on how to open a Solo 401(k):

Establish a bank checking account specifically for your Solo 401(k). This account will be used to deposit contributions, manage investments, and pay investment expenses. It's important to keep funds separate from personal and business accounts to avoid confusion and ensure the account's purpose remains retirement savings.

Recordkeeping is essential for your Solo 401(k). A good Solo 401(k) company can provide a record-keeping system to track contributions and investments. This system will help you stay organized and ensure compliance with tax regulations.

Choose a Solo 401(k) plan that suits your needs. You can select between a traditional 401(k) deferral or a Roth 401(k), depending on your tax situation and retirement goals. The traditional plan offers tax benefits by reducing taxable income, while the Roth plan provides tax advantages during retirement.

Make contributions as both an employer and an employee. As an employer, you can contribute up to 25% of your compensation, and as an employee, you can make a $23,500 contribution (or $31,000 for those aged 50 and above). Ensure that your total contributions do not exceed $77,500 in 2025.

Hire your spouse if they are also self-employed, as this will allow you to invest up to $70,000 each per year. Remember that there is no annual paperwork until your account balance reaches $250,000.

Tax advantages of 401(k)

A Solo 401(k) is a tax-deferred retirement plan that recognizes independent contractors as a business wearing the hat of both employer and employee. As such, you would be able to make contributions according to each title. As an employer, you can contribute up to 25% of your compensation in 2022.

Regular 401(k) deferral provides a benefit by reducing your taxable income for the year since your income is deferred into the plan. As an investor, you can get an immediate tax deduction on your contributions. You'll pay income taxes on those contributions in your later years as you start making withdrawals in your retirement. This tax-deferred plan may benefit those who will most likely anticipate falling into a lower tax bracket during their retirement years.

For those who anticipate being in a higher retirement tax bracket, the Roth 401(k) provides an alternative tax advantage.

Employee and employer contributions should total less than $77,500 in 2025. If you hire your spouse, you can invest up to $70,000 each per year in 2025. There’s no annual paperwork until your account balance reaches $250,000, and the money you save is tax-deductible.

Recordkeeping for 401(k)

A Solo 401(k) is a retirement plan designed for sole proprietors, freelancers, and contractors. It is also known as an Owner Only 401(k) Plan or Individual 401(k).

As an independent contractor, you can make contributions according to each title. As an employer, you can contribute up to 25% of your compensation in 2022.

You will have to establish a bank checking account where you will deposit your contributions and income generated from investments. Funds should be kept separate from personal and business accounts. This ensures that the account is not used for personal gains.

A good Solo 401(k) company can provide a record-keeping system to account for the different types of contributions you will be making along with the investments made from those contributions.

There are a couple of options for opening your Solo 401(k). With a regular 401(k) deferral, the benefit comes from reducing your taxable income for the year since your income is deferred into the plan. As an investor, you can get an immediate tax deduction on your contributions. You’ll pay income taxes on those contributions in your later years as you start making withdrawals in your retirement. This tax-deferred plan may benefit those who will most likely anticipate falling into a lower tax bracket during their retirement years.

Contribution limits for 401(k)

A Solo 401(k) is a retirement plan that recognises independent contractors as a business wearing the hat of both employer and employee. As such, you would be able to make contributions according to each title. As an employer, you can contribute up to 25% of your compensation in 2022.

Employee contributions are tax-deductible and range from $23,500 to $31,000 depending on your age. For those who are 50 or more, the maximum employee contribution rises to $31,000 in 2025. Employee and employer contributions should total less than $77,500 in 2025.

As an investor, you can get an immediate tax deduction on your contributions. You’ll pay income taxes on those contributions in your later years as you start making withdrawals in your retirement. This tax-deferred plan may benefit those who will most likely anticipate falling into a lower tax bracket during their retirement years.

For those who anticipate being in a higher retirement tax bracket, the Roth 401(k) provides an alternative tax advantage.

You will need to establish a bank checking account where you will deposit your contributions and income generated from investments. Funds should be kept separate from personal and business accounts. This ensures that the account is not used for personal gains.

A good Solo 401(k) company can provide a record-keeping system to account for the different types of contributions you will be making along with the investments made from those contributions.

Frequently asked questions