Your Growth Engine is a critical component of your Freedom Generator. Unlike your Income Generator that produces reliable dividends from stable investments, your Growth Engine’s aim is to multiply your money over the years you have left until you’re old enough to access those funds.
If you’re a full-time employee, you likely have access to an employer-sponsored retirement plan you can use to supplement your own Growth Engine contributions. But if you’re a one-man or one-woman business, you don’t have a corporation administering a retirement plan or offering a matching contribution program. So it’s essential you make your Growth Engine—and its health—a serious financial priority.
If securing your financial future isn’t enough reason, the U.S. federal government is offering you some extra incentive. When you set up a retirement plan for your business, you enjoy tax-deductible employer contributions, tax-free growth of money invested in the plan and possible tax credits for getting your plan on the books.
When you’re self-employed, a Solo(k) might be just the plan you need to save big for your golden years. And, if a Solo(k) isn’t right for you, there are some other incredible options out there for feeding your Growth Engine. We’re looking at some of those options in this Investing For Freedom.
What Is A Solo(k)?
A Solo(k) goes by a number of common names. You may find it referenced as a Solo 401(k), Uni-k or one-participant k. Regardless of the terminology, a Solo(k) is a 401(k) plan just like the ones that traditional employers offer their employees.
But unlike the 401(k) plan you find at 9-to-5 jobs, a Solo(k) is a plan for business owners with no employees. When you have a Solo(k), you actually act in two simultaneous roles:
- As the employer: You administer the plan and are eligible to make employer non-elective contributions.
- As the employee: You contribute earned income up to the annual contribution limit.
To help you sort out the numbers, the federal government offers examples and tables for computing the maximum amount you can contribute to your own plan.
Just getting started with your business? You may qualify for a Solo(k) even if you’re not running your business full time. Holding down a traditional job while building your business on the side? That business income is eligible for contribution to a Solo(k). Plus, your spouse could be eligible to join in on the plan.
How Else Can You Fund Your Growth Engine?
When it comes to financing your Growth Engine, a Solo(k) is just one of the many options available to you. Consider these alternatives before choosing the best option for your particular situation:
SEP or SIMPLE
When offering a retirement plan to employees, there are key differences to note between a 401(k), a Simplified Employee Pension Plan (SEP IRA) or a Savings Incentive Match Plan for Employees (SIMPLE IRA). But when you’re the only person participating in the plan, the differences generally boil down to varying contribution limits and the ability to make catch-up contributions.
Review the specifics of how to calculate your allowable contribution for each type of plan before you decide on a Solo(k), SEP IRA or SIMPLE IRA.
An IRA is not a retirement plan. It’s a retirement account you open for yourself through a brokerage firm. You may be familiar with brokerage firms like TD Ameritrade, Fidelity, Charles Schwab, E-Trade and others. Within an IRA, you invest in assets and claim a deduction on your taxes for the money you contribute. However, the money you withdraw when you reach retirement age is treated as income and taxed accordingly.
Like a traditional IRA, a Roth IRA is a retirement account in which you assign your money to specific investments. Unlike an IRA, however, contributions to a Roth are not tax deductible. But the money you withdraw when you reach retirement age—money that has likely grown significantly since you socked it away—is yours to keep without any tax.
Here’s a tip: One you reach a specified income level, you become ineligible for a Roth. However, as a solopreneur, you can set up a Roth Solo(k) and enjoy the same benefits of a Roth IRA, along with a higher contribution limit.
The retirement plan or account type you choose depends on your financial circumstances and your personal preferences. But, whichever way you go, don’t wait to build up your Growth Engine. Resolve this year to choose a direction, and start enjoying the benefits of retirement plan incentives right away.
Dr. Tony is the co-founder of MindShift.money and the best-selling author of three books on personal and business finances. Having achieved Financial Freedom at 27, Dr. Tony believes that through Financially Fit Bootcamp and Cash Flow Cure everyone can get there. He has made it his life’s mission to help others live a life where their money works for them—not the other way around.