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Solo 401(k)s

Harnessing Solo 401(k)s for Retirement Savings
silhouette of two farmers shaking hands in a field with the sunset behind them
In the world of farming and other self-employed occupations, where you likely do not have an employer-sponsored 401(k) plan, securing a comfortable retirement can be a unique challenge. However, an increasingly popular option gaining traction among farmers and other self-employed individuals is the Solo 401(k). This retirement savings vehicle offers a range of benefits for self-employed individuals, providing farmers with a powerful tool to cultivate a secure future.

Understanding Solo 401(k) Plans:

The Solo 401(k), also known as an Individual 401(k) or Self-Employed 401(k), is a retirement savings plan designed for self-employed individuals with no full-time employees. However, you can use the plan to cover you and your spouse. Farmers, as sole proprietors or small business owners can establish and contribute to a Solo 401(k) to build a robust retirement nest egg.

Higher Contribution Limits
One significant advantage of Solo 401(k)s is higher contribution limits compared to other retirement plans. Those with self-employment income can contribute as both employee and employer. As of the writing of this article, individuals under 50 can contribute up to $23,000 (or 100% of compensation, whichever is less) in elective employee deferrals, while those 50 and older can make additional catch-up contributions of up to $7,500, allowing for substantial annual savings. The Solo 401(k) Profit Sharing Contribution is also known as the Employer Contribution. For 2024, you can contribute up to $46,000, no matter your age. Unlike the employee deferral contribution, which is a dollar-for-dollar contribution, the Solo 401(k) plan employer contribution is based on a percentage of earned income. You may make employer profit-sharing contributions up to 20% of your self-employment income (net Schedule C) or 25% of your W-2. Thanks to SECURE Act 2.0, these contributions can be made in both pretax and now Roth (for those who want to pay taxes upfront). Therefore, employers can contribute $46,000 for a total contribution limit of $69,000 or $76,500 for those age 50 or older.

Total Limit for Couples
Your spouse can participate in the Solo 401(k) Plan if he/she earns compensation from the business. Or you file a joint schedule F or C with no employees. He or she can make separate and equal contributions. This increases the annual contribution to $138,000 (under age 50) or $153,000 (50+) that a couple can make for 2024.

Tax Advantages
Business owners often look for year-end expenses to maximize tax deductions and limit their tax liability. The good news is that employer contributions to Solo 401(k)s are tax-deductible to the business, reducing taxable income for the year in which contributions are made. Plus, typically, your employee "deferral" contributions reduce your personal taxable income for the year and can grow tax-deferred, with distributions in retirement taxed as ordinary income. This allows farmers to optimize their tax liability while actively saving for retirement and building as assets that will continue to grow instead of depreciating (see cash bin article).

Roth 401(k) Option
If you prefer to make tax-free withdraws in retirement there is a Roth Solo 401(k) option. 

Diverse Investment Options
Farmers can diversify their Solo 401(k) investments with the same options as traditional retirement plans (i.e. mutual funds, stocks, bonds, ETFs, and more). This flexibility allows investors to select investments that fit their risk tolerance and investment goals. 

No Discrimination Testing
Unlike some other retirement plans, Solo 401(k)s are not subject to discrimination testing. This means that farmers can contribute the maximum allowed amount without restrictions, regardless of the number of employees they may have.

Easy Administration
Solo 401(k)s are known for their straightforward administration, reducing the administrative burden for farmers or business owners who may not have the resources for complex retirement plan management. This simplicity makes it an attractive option for those focused on their business pursuits.

Let's Team Up

In conclusion, a Solo 401(k) plan can be a great option for self-employed individuals who want to save for retirement while also enjoying tax benefits. However, it's important to understand the rules and regulations surrounding this type of plan before making a decision. That's why we encourage you to schedule an appointment with our office. Our team of experts can help you determine if a Solo 401(k) plan is right for you and guide you through the process of setting one up. Don't wait until it's too late to start planning for your retirement.
 
 
 

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  • These bonds will not appear on any financial reports from our office.   Therefore, keep your account number and passwords in a safe place.
  • If you do purchase I-Bonds and you are a client of the Investment Service Center, let us know. Although we cannot facilitate the purchase or redemption, our office monitors the variable rate and will send notifications as we see the rate change.
  • Your purchase is a digital investment. You will not receive paper statements or documentation. It’s essential you add a record of these assets to your balance sheet and any other documentation of assets you own. If you have a safe deposit box or another safe place where you store financial documents, we encourage you to make a note of your I Bonds there.
  • If you want to avoid probate, you might consider adding a joint owner or beneficiary to holdings in your account (see below).
  • Although the interest on the I-Bonds is exempt from state and local taxes, federal tax treatment varies depending on who owns the bonds and how they are used.   You can report interest income from your bonds in one of two ways:
    • Report the interest in the year you owe it. If you start reporting bond interest every year, you must continue to do so every year after.
    • Report the entire amount of interest earned when the bond matures or when you redeem it, whichever comes first.
  • You will not be paid interest until the bond is cashed, even if you choose to report the interest in the year it is earned. You will only receive a 1099-INT on cashed or redeemed bonds. If you choose to report yearly, after the bond is redeemed, the 1099-INT will show all the interest earned from the date of issue, and you will need to subtract the interest you paid tax on in prior years from your taxable income.   

Yes.  As long as your funds are in a personal account. First, it’s important to note that unlike financial institutions, TreasuryDirect(Opens in a new Window) beneficiaries and second owners are set for each fund versus the account. For example, if you purchase two separate bonds for $5,000, you must designate a beneficiary or second owner for each fund held in your account. Your options within treasury direct for each personal holding are:
  • Purchase individually without any second owner or beneficiary.
  • Purchase with someone as the beneficiary (payable on death (POD) to another individual). You can only name one beneficiary per fund purchased. If you wish to have multiple beneficiaries, you need to make individual purchases and name beneficiaries for each fund.
  • Purchase with someone else as the secondary owner. If you register as joint owners, you cannot name a beneficiary. However, at the death of one of the owners, the registration can be changed to add a beneficiary. If both you and the second owner (or beneficiary) die at the same time, the I-Bonds will go to your estate.
No. They can still buy $10,000 in their own account.

Each ownership combination you set up in your TreasuryDirect(Opens in a new Window) account is called a registration. You can have as many registration combinations as you would like, and you can associate any one of your registrations to any bond in your account. Before making changes to a holding, you should review how they are currently set up and see which ones you need changed.

  • Login to your account and click “Current Holdings” at the top. Then, scroll down to the Savings Bond section and select “Series I Savings Bond”. You will see a list of your bonds grouped by your existing registrations.
  • If you need to make a change, you must create a new registration with the desired ownership combination. For example, let’s say you purchased a $10,000 bond and didn’t list a beneficiary. In such a case, only your name would appear as the registrant. Therefore, you would need to create another registration that includes both your name and your beneficiary’s name.
  • To add a beneficiary, click “ManageDirect” and then under the “Manage My Account” section, select “Update my Registration List”. Select “Add a Registration”. Click “Beneficiary”. In this scenario, your personal information would be used in the “First-named registrant” section (as the owner). The “Second-Named Registrant” should be the beneficiary you’ve chosen.
  • If you would like to use this new registration for all new bonds you buy in the future, check the “Make this my Preferred Registration” box at the bottom.
  • When complete, select “Submit”. This new combination (your name and beneficiary name) will now be shown in your list of registrations. You only need to create a registration once. However, at this point it is not associated with any bonds yet, so you need to change the registration on your existing bonds.

Associate New Registration to Existing Bonds.

  • Click on “Edit a Registration” under the “ManageDirect”
  • Scroll down to the Saving Bond section and select “Series I Savings Bonds”. You will see a list of your I-Bonds. Check the box for the ones you would like to change. Choose “Select”. You will see a registration box at the bottom of the screen with a drop-down showing the various registrations you have created.
  • Select the registration you want to use for this bond (in the above example, this would read as (Your Name TIN#, POD Beneficiary Name). Select “Submit”. If you’re still the primary owner, changing the registration doesn’t trigger taxes.

Yes, you can use FS Form 1851.(Opens in a new Window) (Opens in a new Window) An entity account for a trust or a business can’t have bonds with a second owner or a beneficiary. It’s important to note that a second owner or the beneficiary must be a person (it cannot be a trust or business).

To learn more details about I-bonds and to view step-by-step instructions and FAQs, you can visit TreasuryDirect. 

No. You must liquidate an entire bond, so if you think that you might need a portion of the bond in the future, you may want to buy two smaller bonds versus one large one.