When it comes to planning for retirement, it’s crucial to explore the different retirement plans available to achieve your financial goals. One increasingly popular option for self-employed individuals or small business owners is the Solo 401(k). In this article, we will provide an overview of what a Solo 401(k) is, who is eligible for it, and how it differs from other retirement plans like traditional 401(k)s and IRAs.
1. Understanding the Solo 401(k)
A Solo 401(k), also known as an Individual 401(k) or a Self-Employed 401(k), is a retirement plan designed for self-employed individuals who have no full-time employees other than themselves, their spouse, or partner. This plan allows business owners to save for retirement while also enjoying tax advantages.
2. Eligibility for a Solo 401(k)
To be eligible for a Solo 401(k), you must meet certain criteria. Firstly, you must be self-employed or own a small business without any full-time employees, except for yourself, your spouse, or business partner. Full-time employees are those who work more than 1,000 hours per year. Sole proprietorships, partnerships, limited liability companies (LLCs), and corporations can establish Solo 401(k)s. Secondly, you must have earned income related to your self-employment activities.
3. Contributions and Benefits of a Solo 401(k)
One of the main advantages of a Solo 401(k) is the ability to contribute to the plan as both the employer and employee. As an employee, you can contribute up to $19,500 (as of 2022), or $26,000 if you are age 50 or older, in pre-tax or Roth contributions. As the employer, you can also contribute up to 25% of your net self-employment income, or 20% if you are operating your business as a sole proprietorship or single-member LLC. This combination allows you to make larger contributions compared to traditional 401(k)s or IRAs.
4. Solo 401(k) vs. Traditional 401(k)
While both Solo 401(k)s and traditional 401(k)s share similarities, there are a few key differences. The most significant difference lies in the number of employees. Traditional 401(k)s are typically offered by businesses with multiple employees, while Solo 401(k)s cater specifically to self-employed individuals or small business owners with no full-time employees. This distinction affects the contribution limits and administrative responsibilities.
5. Solo 401(k) vs. IRAs
Individual Retirement Accounts (IRAs) are another common retirement savings vehicle, but they differ from Solo 401(k)s in several ways. Firstly, Solo 401(k)s generally offer higher contribution limits compared to IRAs. As mentioned earlier, the Solo 401(k) allows both employer and employee contributions, enabling individuals to save more for retirement. IRAs, on the other hand, have much lower contribution limits. Secondly, Solo 401(k)s offer the possibility of taking out a loan, while IRAs do not permit this feature. Additionally, Solo 401(k)s have no income limitations for Roth contributions, making them an attractive option for high-income earners.
6. Flexibility and Investment Options
When it comes to investment options, a Solo 401(k) offers a wide range of flexibility, similar to a traditional 401(k). You have the ability to invest in stocks, bonds, mutual funds, exchange-traded funds (ETFs), and even alternative investments like real estate or private equity. This flexibility allows you to customize your portfolio to suit your risk tolerance and investment preferences.
The Solo 401(k) is a retirement plan option specifically designed for self-employed individuals or small business owners with no full-time employees, other than themselves, their spouse, or partner. With its higher contribution limits, the ability to make both employer and employee contributions, and a wide range of investment options, the Solo 401(k) offers an attractive retirement savings option. However, it’s essential to consult with a CPA or tax professional to determine if a Solo 401(k) is the right fit for your individual circumstances and retirement goals.
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Most small companies start out as a sole proprietorship which is the easiest and most economical way to start business. It takes 3 to 5 years for any business to mature and to become profitable. Sole proprietorships file their tax returns together with the owner’s individual return on Schedule C. This income is included with all the other income and income taxes are computed together. In addition to income tax, there is a 15.3% tax for Social Security tax and Medicare tax.
It is on Schedule C that all the details of sales and expenses related to the business are reported. The IRS has record of all these details and has an audit program that analyzes these numbers to determine whether it should be audited. There is an audit risk, as a result.
It is our recommendation that sole proprietorships incorporate their business to shield themselves legally, reduce their audit risk, and to take advantage of tax benefits that are available to them. Making the election to be taxed as an S corporation is part of this strategy since S corporations are not subject to the 15.3% tax. There is a cost to incorporating the business as well as maintaining it on a year-to-year basis. Consequently, we recommend that a company show profits of at least $60,000 before considering incorporating their business.
To qualify for the S corporation status, the owners of the company must be considered a permanent resident of the United States. This means that you must have a Green Card or an E2 status.
If you would like us to run an analysis to calculate the tax savings you could be receiving, we provide this service at no charge. The S status can be retroactively applied to be effective for 2020 and 2021. Please contact our office if you are interested in having this tax analysis done.
In my journey as a long time accountant and confidant for the family, I found myself the administrator of Mitzi and Ed’s estate.
I will be in Maui attending Mitzi‘s funeral and delivering the eulogy as part of a traditional Catholic ceremony. It has been a long journey, and I want to thank my staff for putting up with me, including tolerating the mess of boxes laying around the office that I have been going through searching for her last will and testament as well as salvaging their precious memories that I will be putting in their grave along with their ashes. When I get back, I will clean it all up and restore our office to a more pristine condition.
None of this is a coincidence, as my destiny and the destiny of our practice is being woven by these karmic events. It is all a test of my character and conviction, as God is molding me and guiding me to become the person that He meant me to be. It is clear to me that our mission to is to give Peace of Mind to the community by being grounded in Love and Compassion. This is what the world needs and that is sorely missed.
Our mission is going to take me to Hawaii, and eventually to Japan to create a bridge between here and there. This bridge will extend across the United States from the West Coast all the way to the East Coast. We are already establishing roots in Texas and soon we will be expanding further East.
It is part of my mission to recruit others to join me on this journey to change the world 🌎 to be a better place. The Pandemic caused a deep fracture into the core of Human existence that needs to be mended. Especially we need to influence the future generation to bring us all back together as one society, one race, the “Human Race”.
The glue that will bind us together is “Love and Compassion”. It is not easy to find love even within ourselves, let alone share our love with others. There are so many demons within that block us from loving ourselves. “Life is a Battlefield” and the battle that we need to fight the hardest is the battle that goes on within. We must work diligently to build our Heart ❤️ Muscle because “We cannot give what we don’t have”. Therefore, we need to work on ourselves to deepen our love and understanding so that we can pursue our mission with courage, confidence, and the full conviction of our heart and soul.
The question I have for you reader is, “What is my life mission?”
I’m sure this will spur a lot of thought and controversy within yourselves. Having a clear Life Mission or “Do” (道) is not easy, and is a slow process of Self Realization that can grow over time (or not). It depends on you and how honestly you are willing to look in the mirror. As you climb the Mountain of Life, the higher you climb the better the view and clearer is your vision, as the top of the mountain is no longer blocked by the clouds . In looking down the mountain from where you came, with what you know now, you could never go back to the way things were before. This is the point of no return.
I ask you to consider this question and to send me an email with your answer. Please limit your answer to three sentences or less. I know that it will probably start out as an essay which will have a lot of “if’s”, “and’s”, and “but’s. The training is to polish it down to the essence of your core thoughts, deepest convictions, and do your best to visualize who is the person that God meant you to be.
Thank you all for your hard work and being part of this journey with me.
Back in 2022, during the Pandemic the government offered 2 programs for financial relief – The Payroll Protection Program loan (PPP) and the Employee Retention Tax Credit (ERTC). Both programs were designed to help employers keep their employees in spite of declining sales and loss of business during the Pandemic. It was a matter of choosing the most beneficial program between PPP and ERTC. Most businesses chose PPP because it was a forgivable loan and it produced higher benefits. Since then, the laws regarding ERTC have changed several times, and has become another chance for businesses who already received a PPP loan.
You can now receive both PPP and ERTC benefits. You qualify if your sales in 2020 dropped 50% or more as compared to 2019. In addition, it also applies to 2021 if sales dropped only by 20% as compared to 2019. The benefit is a 50% tax credit up to $10,000 in annual salary or $5,000 tax credit per employee for 2020. For 2021, it is a 70% credit up to $10,000 per quarterly salary (3 quarters only) with a maximum of $21,000 credit per employee. For both years, the total possible credit is $26,000 per employee. The tax credit is taxable and the 2020 and 2021 tax returns need to be amended to take this into consideration.
The deadline for applying is coming soon, so please contact us to find out if you qualify. We are able to apply for this credit on your behalf.
Also, each year I design an annual New Year’s card with a letter of reflection and “En-courage-ment”. If you wish to receive the card and be on our mailing list, please send an email to [email protected].
Today, the use of business systems is essential even for small businesses. Even if only a small accounting system is used, the operational efficiency of using the system will be incomparable to doing so manually. To ensure the efficient execution of business, the use of effective business systems is an important part of management strategy.
A common problem for companies that have implemented business systems is the increased workload caused by using multiple independent business systems together. Many companies have independent business systems such as sales management system, inventory management system or accounting system, and many companies may have difficulty exchanging data between systems at the end of each month. In addition, many companies may have duplicate master information in each system, such as vendor and customer masters, and many companies may have to spend a lot of time and effort changing masters. Although a business system has been introduced to improve business efficiency, it is a real downfall if a large burden is placed on the operation of the system.
The implementation of an ERP system is a means of solving these problems. ERP (Enterprise Resources Planning) refers to the concept of properly allocating and effectively utilizing management resources, but ERP system is often viewed as enterprise (core) information system. All functions such as accounting, inventory management, sales management, and procurement management are configured within a single system, and information such as masters is centrally managed. Because all functions are connected, even if a single part is issued to the production line, the result is immediately reflected in the financial statements. Also, when changes are made to master information, they are immediately reflected in all functions that use that master information, simply by changing the common master that is managed centrally.
There are various types of ERP systems, and the choices will vary depending on the size of the company, industry, and budget size, but selecting a system that fits your company will help you improve the efficiency of your operations. If you have any questions about business systems, please contact us.