Tag Archive for: solo 401k

Three Financial Priorities for Young Adults

May 12, 2022/in Education, Financial Planning, General/by Kirsten C. Cadden, CFP®

(or anyone just starting out)

Young adults, or anyone new to managing their own finances, often feel stuck when they think about money. In an age of unlimited access to information, advice, and opinions, deciding what to prioritize can feel paralyzing. At some point, all of us have asked the question “Where do I start?”

To help answer that question, we have identified three priorities for young adults to build a solid financial foundation. Individual circumstances will almost certainly require adaptation, so these three points are intentionally general and flexible so that you can apply them to your situation.

1. Identify Your Goals

Good financial planning requires goals or targets. There is no singular definition of financial success; your needs, wants, and wishes determine what a successful path looks like.

Like all goals, financial goals should be realistic, flexible, and measurable. Goals may include paying off debt, retiring by a specific age, starting a business, buying a home, supporting loved ones, or any other specific expenses that are important to you.

Attach a dollar amount to your goals. If you are not sure how much you might need for a certain goal, there are often simple online tools that can help, such as retirement calculators (like these from SmartAsset and NerdWallet) or home affordability calculators (like these from NerdWallet andZillow).

You may not know all the specifics of a certain goal. For example, when retirement is 20 or 30 years down the road, you might not be able to identify exactly how much income you will need from your investments. Don’t let uncertainty deter you from setting the goal! You can start with an estimate and continue to refine it as your plans take shape.

2. Basic Financial Housekeeping: Cash Flow and Emergency Fund

Cash flow refers to money coming in and money going out. At a minimum, you should know what your income is each month and generally what expenses you have. Don’t worry about making changes at first; just write the information down so you know where you are starting. Then you can start tracking your spending and getting an idea of areas where you may need to make changes.

A basic emergency fund should cover three to six months of expenses. This money should be kept easily accessible in cash — a regular bank savings account, a high-yield savings account, or an online savings account are all great options. When you use some of this money for an unforeseen necessary expense (such as a car repair, covering your bills during a time of unemployment, or a hospital bill), work to replenish your fund once you are able.

3. Establish a Habit of Consistent Investing

Once you have taken care of your basic financial housekeeping, it is time to look to the future. Even if your goals are still just far-off estimates, establishing good habits now will pay off when it is time to get more specific.

Below are a few examples of investment accounts that might fit your situation:

401(k) or 403(b) plan: If your employer and/or your spouse’s employer offers a 401(k) or 403(b) plan, you can contribute pre-tax dollars and possibly receive contributions from your employer. It’s as close as you can get to free money!
IRA or Roth IRA: An IRA is a retirement savings account that is independent of your employer. You can contribute up to a set annual maximum and potentially receive tax benefits. Tax deductions and the ability to contribute to a Roth IRA have some conditions, so check the current IRS rules.
Individual or Joint brokerage account: A brokerage account is an investment account that is not specifically for retirement. There are no tax deductions for contributions you make, but there are also no rules about when you can access money in the account. This is a good option for general investing that may be used for anything. There are also no contribution limits for brokerage accounts, so if you are already contributing the maximum to a 401(k) or IRA, a brokerage account can allow for additional long-term savings.

Keep It Simple

There is an endless supply of financial advice floating around, and knowing what advice to follow can be overwhelming. When in doubt, keep it simple! Focusing on these three starting points will allow you to tune out all the noise and set you up for financial success.

Do you feel like you are ready for steps 4, 5, and 6 in your financial plan? Maybe it’s time to work with a pro. Contact us at Warren Street Wealth Advisors to learn more about how we can help you achieve your financial goals.

Kirsten C. Cadden, CFP®

Associate Advisor, Warren Street Wealth Advisors

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Nothing in this document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.

The Solo 401k

June 4, 2018/in Education, Financial Planning, Investing, Retirement, Taxes/by Justin D. Rucci, CFP®

The Solo 401k

A retirement savings vehicle designed for the smallest businesses.

A solo 401(k) lets a self-employed individual set up a 401(k) plan combined with a profit-sharing plan. You can create one of these if you work for yourself or for you and your spouse.(1)

Reduce your tax bill while you ramp up your retirement savings. Imagine nearly tripling your retirement savings potential. With a solo 401(k), that is a possibility. Here is how it works:

*As an employee, you can defer up to $18,500 of your compensation into a solo 401(k). The yearly limit is $24,500 if you are 50 or older, for catch-up contributions are allowed for these plans.(1)

*As an employer, you can have your business make a tax-deductible, profit-sharing contribution of up to 25% of your compensation as defined by the plan. If your business isn’t incorporated, the annual employer contribution limit is 20% of your net earnings rather than 25%. If you are a self-employed individual, you must calculate the maximum amount of elective deferrals and non-elective contributions you can make using the methods in Internal Revenue Service Publication 560.(1,2)

*Total employer & employee contributions to a solo 401(k) are capped at $55,000 for 2018.(1)

Are you married? Add your spouse to the mix. If your spouse is a full-time employee of your business, then he or she can also make an employee contribution to the plan in 2018, and you can make another profit-sharing contribution on your spouse’s behalf. (For this to happen, your spouse must have net self-employment income from the business.)(2,3)

The profit-sharing contributions made by your business are tax-deductible. Annual contributions to a solo 401(k) are wholly discretionary. You determine how much goes in (or doesn’t) per year.(2,4)

You can even create a Roth component in your solo 401(k). You can direct up to $5,500 annually (or $6,500 annually, if you are 50 or older) into the Roth component of the plan. You cannot make employer contributions to the Roth component.(3)

Rollovers into the plan are sometimes permitted. Certain plan providers even allow hardship withdrawals (loans) from these plans prior to age 59½.(5)

There are some demerits to the solo 401(k). As you are setting up and administering a 401(k) plan for your business, you have to see that it stays current with ERISA and IRC regulations. Obviously, it is much easier to oversee a solo 401(k) plan than a 401(k) program for a company with 15 or 20 full-time employees, but you still have some plan administration on your plate. You may not want that, and if so, a solo 401(k) may have less merit than a SEP or traditional profit-sharing plan. The plan administration duties are relatively light, however. There are no compliance testing requirements, and you will only need to file a Form 5500 annually with the I.R.S. once the assets in your solo 401(k) exceed $250,000.(4)

If you want to hire more employees, your solo 401(k) will turn into a standard 401(k) plan per the Internal Revenue Code. The good news is that you can present your new hires with an established 401(k) plan.(2,3)

On the whole, solo 401(k)s give SBOs increased retirement savings potential. If that is what you need, then take a good look at this option. These plans are very easy to create, their annual contribution limits far surpass those of IRAs and stand-alone 401(k)s, and some custodians for solo 401(k)s even give you “checkbook control” – they let you serve as trustee for your plan and permit you to invest the funds across a variety of different asset classes.(5)

Justin D. Rucci, CFP®
Wealth Advisor
Warren Street Wealth Advisors

Justin D. Rucci is an Investment Advisor Representative of Warren Street Wealth Advisors, a Registered Investment Advisor. Information contained herein does not involve the rendering of personalized investment advice, but is limited to the dissemination of general information. A professional advisor should be consulted before implementing any of the strategies or options presented.

This material was prepared by Marketing Pro, Inc. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Past performance may not be indicative of future results. All investment strategies have the potential for profit or loss. Changes in investment strategies, contributions or withdrawals may materially alter the performance, strategy, and results of your portfolio.Historical performance results for investment indexes and/or categories, generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment-management fee, the incurrence of which would have the effect of decreasing historical performance results.Economic factors, market conditions, and investment strategies will affect the performance of any portfolio and there are no assurances that it will match or outperform any particular benchmark. Nothing in this commentary is a solicitation to buy, or sell, any securities, or an attempt to furnish personal investment advice. We may hold securities referenced in the blog and due to the static nature of content, those securities held may change over time and trades may be contrary to outdated posts.

Citations.

1 – irs.gov/retirement-plans/one-participant-401k-plans [10/25/17]
2 – mysolo401k.net/solo-401k/solo-401k-contribution-limits-and-types/ [2/13/18]
3 – doughroller.net/retirement-planning/solo-401k-best-retirement-plan-self-employed/ [5/21/17]
4 – tdameritrade.com/retirement-planning/small-business/individual-401k.page [2/13/18]
5 – thecollegeinvestor.com/18174/comparing-the-most-popular-solo-401k-options/ [12/11/17]