"Should I..." Series: Sole Proprietor

Welcome to my “Should I…” series!  In this series, I will answer questions that I hear frequently from my clients.  I would love to answer your questions too.  So leave any questions you may have in the comments below and I will answer them in a future “Should I…” post.

As a sole proprietor, should I open a SOLO 401k plan?  Or is an IRA or a Roth IRA a better idea?  I am just starting my consulting business and expect to gross roughly 200k this year with a 140k income.

Solo 401k

I recommend you open both a SOLO 401k and a Roth IRA.  With a Roth IRA, you invest after-tax dollars and get the benefit of taking out the money free and clear (with no taxes) when you retire.  You are also able to withdraw the money from your Roth IRA should you need it pre-retirement with no penalties. If your adjusted gross income exceeds $120k (assuming you are single), you cannot fully contribute to a Roth IRA, so talk to a financial advisor about a backdoor Roth IRA, which is a great option.  If you want to save more than the Roth IRA max ($5500 if you are under 50; $6500 if you are over 50), opening a SOLO 401k is a good way to do it.  It will allow you to contribute up to  $18,500 if you are under 50, and $24,500 if you are over 50.  Plus, you can contribute 25% of your salary up to a maximum $55,000 (or $61,000 if you are over 50).  There are lots of factors and regulations to consider, so please let me know If I can help!