DYK: Solo 401K

Are you or someone you know self-employed? If so, at some point you’ve had to think about setting up a retirement plan for your business. Someone may have approached you with the idea of a SEP IRA or a similar arrangement, but did you know that you also have the option to set up your own 401k? Depending upon your situation, this might be a significant opportunity!

To understand why let’s dive a little deeper and compare.  We’ll start with the most common alternative: the SEP IRA. With a SEP IRA, the self-employed individual can make ‘employer’ contributions of up to 25% of their eligible compensation.  There’s a limit to this, though, and it’s capped out at $56,000 (as of 2019). This tends to work well for the business owner who has no employees and earns a high income with little variation from year to year. But what if someone doesn’t make as much money from the business, yet still wants to contribute a high percentage of their income?

A Solo 401k could allow that person to make contributions on two fronts:  as both the ‘employer’ and the ‘employee’. If you’re a savvy reader or particularly well-versed in this from having done this research for your own business, you might be thinking, “But, there’s still the same overall cap of $56,000, so what’s the difference?”

Let’s take a closer look with a couple of hypothetical scenarios:

Scenario 1: Jack, a 50-year old sole proprietor, is making $200,000 per year (net profit). In determining what he could contribute to his SEP IRA, he first has to reduce that figure by a certain percentage (based on IRS guidelines & formulas). For this situation, the end result is an allowable SEP IRA contribution of somewhere around $37,000 for the given year.

Scenario 2: Diane, a sole proprietor who also happens to be making $200,000 in 2019, sets up a Solo 401k. She wants to ensure that the account is funded before December 31st, so she contributes the maximum amount that she can as an employee right away – $19,000. But remember, she gets to contribute as the employer, too.  Once she has a better idea of her tax situation, she funds the account with as much as she can on the employer side.  Now, this puts the total amount just shy of the standard $56,000 limit – already a big difference! However, like Jack, she happens to be 50 years old. As is the case with other/larger 401k plans, a Solo 401(k) has an additional “catch-up” provision that allows people over 50 to contribute more.  This catch-up amount is $6,000, which effectively raises her overall funding limits, as well.

The End Result: A net Solo 401k contribution of nearly $62,000 – roughly 67% more than Jack!

Said differently, Jack funded a SEP IRA with around 19% of his income, while Diane could contribute close to 31% through her Solo 401(k).

Choosing the right retirement plan for your business can be difficult and can involve unforeseen or unintended effects. If working out these scenarios seems tricky, or if you just don’t have the time to work through all of that, it often makes sense to consult with an advisor who has experience navigating this complex landscape.  Doing so will make it easier for you to evaluate options, coordinate with your tax professional, and feel confident that you’re making the right choice for you and your business.


Rhett Garner, CLU®, ChFC®, CFP®
Vice President – Financial Advisor
Heritage Wealth Management Group


This content is being provided for informational purposes only and should not be construed as financial, investment, tax, or legal advice. The views and opinions expressed do not necessarily reflect those of the company. Always consult a licensed investment professional before making investment decisions. All investments and financial strategies involve various risks, including the possibility of loss of principal. Investment values and returns will fluctuate. There are no implied guarantees or assurances that any target objectives will be met. Future performance may differ significantly from past performance due to many different factors. The Heritage Wealth Management Group, its employees, affiliates, and associated persons shall not be held liable for losses resulting from financial decisions based on information or viewpoints presented herein.


October 2019 Market Commentary

“There are three kinds of lies: lies, damned lies, and statistics.”

Mark Twain “Chapters from My Autobiography” (1907)


The US stock market as measured by the S&P 500 is up year to date since the first of the year by 21.2%. Good news. The stock market is up year over year by 4.00%. Not such good news. The stock market in the past six months is up by 4.00%. Boring news. Lest we forget, the stock market declined by 17 ½% in the three months prior to Christmas Eve 2018 so most of the 2019 return reflects a recovery from the prior late 2018 market decline.

Heading into October bears had a surfeit of reasons to be, well, bearish. Prospects for the settlement of the trade dispute between the US and China had dimmed. Corporate earnings were expected to reflect the slowing of US and global economic growth rates, the ISM Manufacturing report had dropped to its lowest level since the recovery from the Global Financial Crisis and then there was the matter of the inverted yield curve with its reportedly uncanny ability to predict the onset of economic recessions.

Equity Market Commentary - 2019 Recession - Heritage Wealth Management

Interestingly, despite the (or perhaps more accurately because of) this bearish backdrop, the S&P made a new high on the 28th and was positive 3.4% for the month. Perhaps more interestingly still the Consumer Confidence Survey revealed that slightly more US consumers, 32.2%, expected the stock market to be lower in twelve months than expected it to be higher, 31.7%, a phenomenon that has occurred only six times in the past thirty years.

Something else may be occurring in the financial markets that may be offering bulls a firm foundation upon which to rest their case. Investors in the US have allowed the return of US equities, in particular the large-cap tech names, to obscure the reality that post Global Financial Crisis global equity market investors have found opportunities for significant profits to be less than an equal opportunity experience with ten-year annual rates of return in foreign developed markets averaging 5.4% and that of emerging markets 3.1%. Since August 23rd the S&P has risen 6.5% but foreign developed markets are up 8.8% and emerging markets 9%. This isn’t sufficient information to confirm that a reversal of fortune awaits domestic and foreign equity markets but it’s worth keeping an eye on.

Equity market bears base their pessimism on the economy. The US economy hasn’t been in recession for ten years so we must be due for one. The Federal Reserve will continue to lower interest rates and interest rates in the bond market will remain low and possibly even go negative. Inflation is likely to be a no show for years to come but its opposite, deflation, is something we need to take care to avoid. This is consensus opinion but a better wager to make may be a contrary one.

Recessions occur to correct excesses in the marketplace be they financial or economic. Where do these excesses currently exist? What if central banks, both US and foreign, after ceaselessly shoveling additional forms of stimulus to light the fires of economic activity, succeed beyond levels of their current reckoning and the global economy is about to enter into a multi-year period of accelerating economic growth rates? Debt servicing costs for US consumers are at their lowest levels in forty-five years. US unemployment levels in the US are plumbing historic lows and wage rates, especially for those compensated at lower levels, are increasing at an accelerating rate as are a variety of measures of consumer spending that represent 70% of the US economy.

All things being equal I’d rather be an optimist than a pessimist but better still I’d like to wager on increasingly good news as a guidepost towards increasing investment returns in the financial markets. How about you?


Mark H. Tekamp

November 6, 2019