Earlier this year the US government reported that Social Security’s long-term, unfunded liability now exceeds $50 TRILLION.
Moreover, they forecast that the Social Security and Medicare trust funds will run out of money in 2034.
This is the government’s own calculation.
(And the government’s math is based on rosy assumptions that there will be no more wars, recessions, financial crises, major disasters, etc. which could make the problem even worse.)
Bottom line: The younger you are, the less you should count on Social Security in your retirement plans. You must save independently for retirement.
And fortunately, there are great solutions.
It’s possible to create a more robust retirement structure like a Solo 401(k), and then put potentially tens of thousands of dollars each year into that structure from a ‘side-business’ that you start.
You could make money doing just about anything– selling products on Amazon, generating advertising revenue from YouTube videos, renting out rooms on Airbnbs, freelancing…
You could literally walk dogs on the weekends, and then stash that money into a tax-advantaged Solo 401(k).
If you’re currently an employee at a US-based company, you might be familiar with how a 401(k) works: You make pre-tax contributions to your retirement, and sometimes the employer even matches what you put in.
The company plan probably doesn’t offer much leeway in terms of where you can invest that money, though. At best, they probably give you a list of mutual funds from which to choose.
But a Solo 401(k) – a.k.a. an Individual 401(k), Self-Directed 401(k) or Self-Employed 401(k) – lets you decide how your funds are invested.
And unlike a conventional IRA – another common retirement structure – it lets you contribute MUCH more money to your retirement before it’s taxed.
It just has to be done with income from self-employment, or from a side job.
And that’s precisely the idea with a SOLO 401(k)– it means that you are self-employed and do not have any eligible employees.
You can have a full-time job elsewhere– including a job that offers a regular 401(k) plan– and still have a side job with a solo 401(k).
Now, ordinarily,the government will tax you heavily on your side income. You’ll have to pay federal and state income tax, AND self-employment tax.
But with a Solo 401(k), you can move substantial income into your retirement account before the IRS receives a penny.
In total, the IRS says you can contribute $56,000 to your Solo 401(k) plan in 2019, plus a few thousand dollars more if you’re over the age of 50.
But that doesn’t mean you can contribute 100% of your self-employment earnings up to $56,000 to your solo 401(k). You can contribute quite a lot. But, there are rules.
Remember, the basic idea behind a ‘regular’ 401(k) is that BOTH an employer and an employee make contributions to the plan.
As an employee, you can contribute up to $19,000 to your 401(k) in 2019, and $25,000 if you’re over the age of 50.
That limit applies to ALL of your 401(k)s. So if you have a regular job with a regular 401(k), and contribute $8,000 to that plan, you could contribute an additional $11,000 (or $17,000 if you’re over 50) to your solo 401(k).
But with a solo 401(k), you’re BOTH the employer and the employee.
So in addition to the $19,000 (or $25,000 if you’re over 50) employee contribution limit, you can also contribute additional money as the employer.
That’s one of the benefits of being your own boss.
The math on this is a bit quirky. But a general guideline is that you (as the ‘employer’) can contribute roughly 20% of your net income if you’re operating as a sole proprietor (i.e. -not- a corporation).
That’s in addition to the $19,000 you can contribute as an employee.
So let’s say you earn $25,000 this year from side income, and you’re under 50.
You could contribute $19,000 as an employee, and then another roughly $4,000 to $5,000 as an employer.
So -almost- all of your self-employment income could end up in your Solo 401(k).
That’s absolutely GAME CHANGING for your retirement. If you can consistently put away an extra $10,000 to $20,000 per year, and make intelligent, long-term investments, you will definitely be living like royalty when it comes time for retirement.
Other benefits of a Solo 401(k) include:
Flexibility
- You can borrow money from your own Solo 401(k), something you cannot do with IRAs.
- You can roll over 401(k)s from old employers, or contribute side-by-side to current 401(k)s.
- You can hire contractors (NOT employees) as your side business grows and stick with a Solo 401(k).
More Investment Options
- Invest in asset classes outside of US stocks and bonds (much like a self-directed IRA).
- Buy income generating real estate and your earnings go back into your self-directed 401(k) tax-free (unlike rental properties financed with a self-directed IRA).
- Open an account with your 401(k) at some crypto exchanges, or store crypto-currency in cold storage hardware wallets.
- Buy and store precious metals.
For more information, check out this podcast, which covers Solo 401(k)s in more detail.
And if you are already a member of our flagship international diversification service, Sovereign Confidential, click here to read our in-depth intelligence report where we cover the Solo 401k in more detail.
