What is a 401(k)?

A 401(k) is a tax-advantaged retirement account. You set aside a certain amount of money this year, get a tax break this year and your money, which will be invested in the stock market, grows TAX-FREE until you decide to take it out in retirement. The earliest you can take money out of a 401(k) without a 10% penalty is age 59.

Because the tax savings are SO GREAT, congress has actually limited the amount a person can contribute to a 401(k) each year.

An individual (we’ll call them the Employee) for 2022 can contribute $20,500 to a 401(k).
The company (we’ll call them the Employer) for 2022 can contribute $40,500 to a 401(k) on behalf of that employee.

That’s a whopping total of $61,000!

If you are over age 50, you can contribute an additional $6,500.

Most employers aren’t giving their employees an extra 37 grand to stick in their 401(k)…unless of course you ARE the employer and the employee is you. And that’s why we love the Solo or Individual 401(k).

What is a Post-Tax 401(k) or Mega Back Door Roth IRA

Some employers like Amazon, Asana, Google, Microsoft, Palantir and Block allow employees to make both regular ($20,500) AND after-tax contributions to a 401(k). This is an incredible way to shelter your income from taxes.

PRE TAX or ROTH: An individual (we’ll call them the Employee) for 2020 can contribute $20,500. Does NOT include employer match.
POST TAX or AFTER TAX: The individual for 2020 can contribute an additional $40,500. This includes the employer match.
- Most 401(k) plans that allow an after-tax contribution have a feature that allows you to AUTOMATICALLY convert the after-tax dollars to a Roth IRA at the end of the year. What an amazing benefit! Most people can only contribute $6,000 to a Roth IRA each year. If you play your cards right - you could contribute $46,500! That’s why it’s known affectionately as the “Mega Back Door Roth IRA.”

What is a Solo or Individual 401(k)?

Same as a regular 401(k) but it’s just for a single person or a single person and their spouse. You probably haven’t heard of a Solo 401(k) before because they aren’t exactly easy to set up.

With a Solo 401(k), you are BOTH the employee and the employer!

Remember:

An individual (we’ll call them the Employee) for 2020 can contribute $20,500 to a 401(k).
The company (we’ll call them the Employer) for 2020 can contribute $40,500 to a 401(k) on behalf of that employee.

So, as a self-employed business owner, you can contribute UP TO $57,000. BUT there are a few catches.

You can only contribute up to the amount you made. If you only made $17,000 as a freelancer, you can only contribute $17,000 as the employee.
The employer contribution (that $37,500) is limited to 25% of the net income of the business if you are a sole-proprietor.
If you are an S-corp, the employer contribution is limited to 25% of the salary you pay yourself.

For example: You are a photographer (sole-proprietor) who is going to make $345,000 in 2020. You have no employees but you do pay a part-time assistant $2,000/month to work at odd hours. Your other expenses for the year are $50,000.

Total income: $345,000

Minus expenses: $24,000 + $50,000

Net income: $271,000

Maximum employee Solo 401(k) contribution: $20,500

Maximum employer Solo 401(k) contribution (25% of $271,000): $67,750 << NOPE! The IRS limit is $40,500.

Total Solo 401(k) contribution: $20,500 + $40,500 = $61,000

Do I need a Solo 401(k) or a “Regular” 401(k)?

The most important question is: do you have employees? If you have employees (people who work for you who do not get to make their own schedule) then you are NOT eligible for a Solo 401(k).

Okay, so how do I set up a Solo 401(k)?

Complete the application below and please reach out to us if you have any questions. We’ll walk you through the process. Your 401(k) will be managed by Brooklyn FI at TD Ameritrade.

Okay, but I have employees, how can I set up a “Regular” 401(k)?

It’s actually never been easier! We work with a provider called Guideline. It costs about $10/month per employee. Please email us if you’d like to explore a Guideline 401(k) for you and your employees.