Wall Street Pushes Solo 401(k)s as More Americans Work for Themselves (bloomberg.com) 22
An anonymous reader shares a report: A niche retirement plan favored by freelancers is quickly becoming a hot Wall Street sales pitch, as more and more Americans look for ways to shelter a bigger chunk of their paychecks from taxes. Known as solo 401(k)s, they allow the self-employed to contribute $72,000 a year into tax-advantaged retirement accounts. That's nearly three times the maximum for typical salaried workers in the US.
While they've existed for decades serving a workforce that often struggled to earn enough to max out those contributions, wealth planners like JPMorgan Chase & Co. and Betterment are now racing to tap into burgeoning demand from a newer, and wealthier cohort: Post-pandemic contractors and self-employed DIY savers looking to shelter more income, grow assets tax-deferred or tax-free, all with the click of a button.
The pitch is simple: Because of a quirk in the tax code, self-employed workers effectively contribute twice to their 401(k)s -- once as an employee on their own behalf and then again as a business owner making matching contributions. The platforms take care of the paperwork and clients get institutional-level tax planning and investment flexibility. More than three-quarters of America's record 36 million small businesses now have just a single employee, the owner. Cerulli Associates projects that total 401(k) plans in the U.S. will surpass 1 million by 2030, and the fastest growth is expected in sub-$5 million "micro" accounts.
While they've existed for decades serving a workforce that often struggled to earn enough to max out those contributions, wealth planners like JPMorgan Chase & Co. and Betterment are now racing to tap into burgeoning demand from a newer, and wealthier cohort: Post-pandemic contractors and self-employed DIY savers looking to shelter more income, grow assets tax-deferred or tax-free, all with the click of a button.
The pitch is simple: Because of a quirk in the tax code, self-employed workers effectively contribute twice to their 401(k)s -- once as an employee on their own behalf and then again as a business owner making matching contributions. The platforms take care of the paperwork and clients get institutional-level tax planning and investment flexibility. More than three-quarters of America's record 36 million small businesses now have just a single employee, the owner. Cerulli Associates projects that total 401(k) plans in the U.S. will surpass 1 million by 2030, and the fastest growth is expected in sub-$5 million "micro" accounts.
IRA??? (Score:1)
Why call it a 401(k)? It's an Individual Retirement Account, aka an IRA.
It is clearly not already authorized by Section 401, subsection (k) of the 1978 version of the Internal Revenue Code.
Re:IRA??? (Score:4, Informative)
It sounds like you can get some tax advantages that are specific to 401(k) if you, as a business, decide to do 100% unlimited matching for your you, as the employee, allowing you to get 401(k) advantages but with twice the effective limit.
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Something like this. You can contribute. Your employer (you) can contribute a matching amount.
I'll have to check the details with my accountant. If she hasn't skipped to The Caymans with my savings account yet.
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If you’re self-employed, here’s the deal:
SEP IRA: Contributions are capped at about 20% of net earnings. So if you make $100K, you can put in roughly $20K. To contribute $70K, you’d need around $350K in earnings.
Solo 401(k): You get two components:
Employee deferral: Up to $24,500 (or $32,500 if you’re 50+).
Employer (profit-sharing): About 20% of net earnings, same as SEP.
Combined, on $100K earnings, you could contribute $44,500 (or ~$51k if 50+).
The overall IRS limit is $72,000 (plus
I want to pay my fair share. (Score:2)
Done and done.
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>"I'll make you a deal, I'll pay the same rate Elon pays. Done and done."
You forgot to create several companies producing lots of useful things that are in high demand, hire and pay a eighth of a million employees (most for decades), contribute $474 million to charities, and pay many billions in business, payroll, and other taxes.
Musk's wealth is primarily in the form of stock, which is not taxed until sold (and has no actual/real value until sold). In 2021 he paid $12 billion in income tax, alone, when
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The loophole that the ultra rich use is taking out loans on unrealized assets like stocks. That should be closed.
Why? Loans are a contract between two private parties. Although the banks are regulated (can't use garbage for security), if the assets are regulated (stocks are) and their market is transparent abd if Musk pays them back, why not?
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It sounds like you can get some tax advantages that are specific to 401(k) if you, as a business, decide to do 100% unlimited matching for your you, as the employee, allowing you to get 401(k) advantages but with twice the effective limit.
I imagine this can already be done right now. However, there are major disadvantages because true companies also have to pay FICA and unemployment taxes in addition to what the employee pays. The new push is an attempt to get the benefits of higher 401k contributions without having to pay the other taxes.
Re: IRA??? (Score:4, Informative)
Nope. IRA has a much lower contribution limit and SEC places tighter regulations on what kind of assets you can hold in your portfolio. You can put practically any kind of investment into an IRA that you'd otherwise have in a retail trading account.
It's in a bit of a weird place because your employer can contribute a much larger dollar figure into your 401k than you can. But if you're self-employed, you can do the same.
Most brokerage firms charge employers money for 401k plans, and the better ones aren't cheap for them, even if you never pay that. Curious if they're just telling the self-employed that they pay nothing so they at least get those mutual fund management fees, and presumably those free plans only allow investment into that firm's own mutual funds. The more expensive plans are a bit like a cable subscription where your get extra options not available with basic, such as e.g. vanguard funds even though you're with fidelity.
My employer provides a basic Traditional and Roth 401k (your choice), and rather than a match, we get something else that is far better.
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IRAs have an income limit for pretax contributions, if you have a working spouse who is covered by a workplace plan, even if you aren't. If your combined income is over about 250k, then an IRA isn't tax deductible. Which, AFAIK, totally defeats the purpose and makes it useless.
Itâ(TM)s more about a positive relationship. (Score:2)
The fact that the person can contribute as both the employer and employee isnâ(TM)t really where the win is. The win is where the employer is actively trying to provide positive perks for the employee. Many major tech companies have equally as good 401k provisions (where you can reach the statutory max) because they are trying to provide good perks without increasing salaries. But at other companies, the 401k can have meager matches with annoying vesting provisions and terrible load funds.
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Quirk in the tax code (Score:2)
One of many such quirks which are absolutely, definitely not intentional nor contributing to widening the economic class gaps or tax burden shouldered by those with the least.
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A quirk, but not a loophole (Score:2)
One of many such quirks which are absolutely, definitely not intentional nor contributing to widening the economic class gaps or tax burden shouldered by those with the least.
Huh? The tax burden of those with the least is very low or negative [treasury.gov].
The solo 401k may be a "quirk" but isn't a loophole. Self-employed people are required to pay both the employee and employer portion of OASDI tax and medicare tax, so why wouldn't they be allowed to contribute the employee and employer portion for a 401k? And a solo 401k is available to any self-employed person; it's not exclusive to the already rich.
That pre-tax contrbution might not be saving you $ (Score:1)
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Do post-tax contributions also reduce the QBI deduction?
And with the way things are going, perhaps austerity measures will have the lowest tax bracket at 30% in other 10 years.
Re: That pre-tax contrbution might not be saving y (Score:1)
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The Secure Act set limits on the over 50 extra contributions, too. If you make more than $150k, the extra contribution must be made to a Roth 401(k) so you don't get the extra deduction up front. I'm not sure how that affects the employer's contribution. Tax planning is a PITA!