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Retirement isn't something that's usually on the minds of most sole practitioners. Well, not for a while anyway. They're usually wrapped up with trying to grow their firm. However, even a single-lawyer operation needs to think about retirement. And for them, a solo 401(k) might be their best bet.
Also known as an individual 401(k), a solo 401(k) is a special retirement plan designed for businesses that have few or no employees. It's not actually a new program. Rather, a solo 401(k) has the same rules and requirements as traditional individual 401(k) plans. The differences came in 2002, when an amendment in tax laws created certain benefits for small and solo business owners.
So what kind of benefits does a solo 401(k) plan offer over traditional retirement options?
1) Higher and More Flexible Annual Contributions
Traditional IRAs only allow participants to give up to $5,000 annually. Those over age 50 can put in $1,000 extra. A solo 401(k) lets individuals contribute up to $50,000 annually. And participants over age 50 can toss in $5,500 more. That's great news for solo lawyers late to the retirement planning game.
Also, a solo 401(k) allows for varying and discretionary annual contributions. So if you have a bad financial year, you don't have to worry about dumping a lot of money into the account.
2) Ability to Borrow
Unlike with an IRA, solo 401(k) holders can borrow up to $50,000 or half the value of their account, whichever is less. It can be done for any purpose, but it has to be paid back quarterly within five years. And of course, you'll also be charged interest.
3) Easier Operation
There's no need for a custodian in a solo 401(k) account. And additional annual filings are generally non-existent if your plan is below $250,000 in assets.
Solo 401(k) accounts also allow for consolidation of money from other tax-deferred retirement plans, like IRAs, SEPs, and profit sharing and defined benefits plans.
If you're a sole practitioner, putting off retirement planning isn't a good idea. A solo 401(k) could be one of the best ways to secure a carefree post-lawyer life.