Leverage Retirement Contributions

Traditional 401(k) plans are probably the most common retirement plans since these are the most popular employer-sponsored plans offered by most corporations throughout the U.S. 401(k) plans lower your taxable income by contributing to a pre-taxed retirement savings vehicle. These employer-sponsored plans allow you to contribute up to $19,000 ($19,500 in 2020) in pre-tax dollars to a retirement account. Earnings on the account accumulate tax-free until funds are withdrawn. This is an effective way to save money and lower your taxable income. If you are over 50, you can contribute an additional $6,500 ($6,000 in 2019) for a potential annual contribution of $26,000 in ($25,000 in 2019).

Solo 401(k) plans are one-participant plans like traditional 401(k) plans with regards to rules and requirements except these plans are available to owner-only businesses with no employees. Many types of owner-owned businesses can qualify as a plan sponsor whether the owner is a sole proprietor or organized as partnership, LLC or a corporation.

Contribution limits to solo plans are capped at $56,000 for 2019 ($62,00 if age 50 and over) and $57,000 for 2020 ($63,500 if age 50 and over). Under the Solo 401(k) plan, the IRS allows owners to make contributions in both capacities as an owner and an employee. This makes the plan a much more attractive plan than traditional 401(k) or SEP-IRA plans for sole proprietors and athletes who incorporate themselves as an LLC or corporation.

This plan is excellent if you generate income through freelance work or are one of the many Americans now making extra income through the booming gig economy. SEP IRA plans are more flexible than traditional 401K plans allowing you to make contributions through April 15th of the following tax year (or October 15th for late season filers). Unlike 401(k) plans, SEP plans can be established after year-end until the tax-filing deadline (including extensions).

With SEP plans, contributions can be made throughout the year or one-time through a lump sum deposit. You can contribute 25% of your salary to a SEP plan with $57,000 the maximum overall contribution limit for 2020 ($56,000 for 2019). All contributions within these limits are tax deductible.

Deciding which retirement plan is right for you should be based on your financial goals. Please consult with your financial planner to determine if a pre-taxed retirement vehicle such as the ones discussed above is the right path for you; or if an after-tax retirement plan, such as a traditional IRA, is better for your long-term financial goals.