Solo 401(k)s

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 another retirement planning option.

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.

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.

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.

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).

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. 

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.

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.