The creator economy is booming. In a 2022 survey, 30% of surveyed 18 to 24 year olds and 40% of 25 to 34 year olds considered themselves as content creators. In total, about 200 million people worldwide considered themselves as creators. But while the rise of solopreneurs is a positive thing, many creators are wondering what happens in their retirement.
Fortunately, while most creators do not have access to an employer-sponsored 401k plan and are on their own when it comes to preparing for retirement, there are even better options that they may be eligible for.
Solo 401k
You’ve probably heard of a 401k already. If you work at a company that offers a 401k plan, you’re given the option to participate and contribute a portion of your salary into the plan to save for your retirement. The downside is that unless you work for an employer that offers a 401k plan, you cannot participate.
Fortunately for creators, there’s an even better version of the 401k that’s designed for self-employed individuals called a solo 401k. Unlike a regular 401k plan, a solo 401k can be opened without an employer. As the owner of your own business, you can open an account up for yourself and make contributions as both the employer and employee.
Before we continue, download the Solo 401k Handbook: Everything you need to know about the solo 401k in a handy PDF format.
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The Solo 401k Handbook
Everything you need to know in a handy ebook format.
Eligibility
The eligibility rules around a solo 401k are simple: All you need is business activity (ie. make money from a business) and have no employees (besides your spouse).
Solo 401k requirements
- Have business activity
- Have no full-time employees, including part-time employees who have reached 21 years of age, and have worked over 500 hours per year for 3 consecutive 12-month periods. The only exception to the no-employee rule is your spouse.
The following types of employees are still permitted:
- Employees under 21 years old
- Part-time employees
- 1099 contractors
- Union employees
- Nonresident alien employees
Features & tax benefits
There’s a reason why a solo 401k is considered the best retirement plan for business owners and self-employed individuals. Let’s go through the features and tax-benefits that come with the plan.
Note: Not all solo 401k plan providers offer all of the features below. You can compare the best solo 401k providers here, or learn more about the Carry Solo 401k (which comes with all features listed below).
- Highest contribution limit of any retirement plan: The contribution limit for 2023 is $66,000 ($73,500 if you’re over the age of 50). In comparison, a regular 401k plan has a contribution limit of $22,500 ($23,000 if you’re over 50 years old). With a Roth IRA, it’s just $6,500 ($7,500 if you’re over 50).
- Tax-free compounding: You pay zero taxes when you sell assets for a profit or earn an income from your assets. All profits go straight back into your solo 401k account to be reinvested. The absence of capital gains tax on your profits can help your investments grow exponentially faster with tax-free compounding.
- Roth option: Some solo 401k plans come with a Roth account where you can contribute after-tax income and enjoy tax-free withdrawals in retirement, no matter how large your gains. You can contribute up to $22,500 ($30,000 if over 50) to a Roth solo 401k for 2023. There’s also an option to do a mega backdoor Roth conversion and contribute up to $66,000 into a Roth solo 401k.
- Tax-free Roth withdrawals: Contributions to a Roth option are made with after-tax dollars, and you pay zero taxes when you withdraw from the account in retirement.
- Ability to do a mega backdoor Roth: The mega backdoor Roth strategy can be used with a solo 401k plan and it allows you to contribute the entire $66,000 limit to a Roth account. Carry is one of the few solo 401k plan providers that offer this option.
- Tax deductions: Contributions made to your pre-tax solo 401k get deducted from your taxable income. If you prefer, you can even deduct up to $66,000 for 2023 by making all of your contributions as pre-tax. In other words, you can reduce your taxable income for 2023 by up to $66,000.
- Invest in any asset class: With most retirement accounts, your investment options are limited to traditional assets like stocks, mutual funds, ETFs, and bonds. For example, with a regular 401k plan, your investment options are limited to just a handful of mutual funds (usually 8-12 options) pre-selected by your employer when they set up the plan. With a solo 401k, you’re allowed to invest in any asset class, with a few exceptions. That means you can invest in alternative assets like crypto, real estate, and startups through your retirement plan. Combined with tax-free compounding in your account, and the ability to take tax-free withdrawals through a Roth solo 401k, your investment gains can potentially be withdrawn completely tax-free in retirement.
- Unlimited rollovers: You can rollover as much as you want from another retirement account and it doesn’t affect your contribution limits for the year. If you have existing funds in an IRA or an old 401k, you can transfer the funds to your new solo 401k and immediately start to use the same funds to take advantage of the solo 401k features and benefits.
- Loan option: You can borrow up to 50% of your plan value up to a maximum of $50,000. Solo 401k loans have no credit checks, doesn’t affect your credit, and can be used for anything you want. Learn more about solo 401k loans.
- No income requirements: It doesn’t matter if you make $500 a month with a side business or $500,000 a year. Any self-employed business activity makes you eligible as long as you have no employees.
How to open a solo 401k
The process of opening a solo 401k differs depending on what plan provider you choose. The process typically looks something like this:
- Choose a plan provider
- Get an Employer Identification Number (EIN)
- Fill out an application and plan adoption agreement
- Get an EIN for your solo 401k trust
- Open bank accounts for your solo 401k trust
- Fund your solo 401k
- Start investing
With Carry, the entire process is integrated into one seamless application process, takes under 10 minutes and can be done completely online with no paperwork required. Get started here.
SEP IRA
If eligible, the solo 401k is the best retirement plan option for YouTubers, influencers, and creators. However, if you do have employees that make you ineligible for an account, your next best option is likely the SEP IRA.
A SEP IRA is another retirement plan designed for business owners and it allows you to have employees. However, there are some major differences between a solo 401k and SEP IRA.
What a SEP IRA does not have compared to a solo 401k
No Roth option: A SEP IRA does not have a Roth option. All contributions are made as pre-tax, meaning no option to take tax-free withdrawals in retirement.
No catch-up contributions: A solo 401k and SEP IRA has the same contribution limit if you’re under 50 years old. However, a solo 401k lets people 50 years of age or older to make an additional $7,500 in contributions. A SEP IRA has no catch-up contributions.
No ability to invest in alternative assets: A solo 401k lets you invest in virtually any asset class, including alternative assets. A SEP IRA only lets you invest in traditional assets like stocks, bonds, mutual funds, and ETFs.
No loan option: A solo 401k lets you borrow up to 50% of your plan value, up to a maximum of $50,000. A SEP IRA has no loan option.
No employee contributions: A solo 401k lets you contribute to your plan as both the employee and employer, giving you more flexibility in your tax savings. With a SEP IRA, you can only contribute as an employer and it takes more business income to be able to max out contributions to a SEP IRA than a solo 401k.
Matching contributions
A SEP IRA has required matching contributions. If you contribute to your SEP IRA as the employer of your business, you also have to contribute the same percentage for every eligible employee’s SEP IRA as well. For example, if you decide to contribute 10% of your compensation into your SEP IRA, you also have to contribute 10% of every eligible employees’ SEP IRAs as well. Because of this rule, if you have a lot of employees, a SEP IRA might not be the best retirement plan option for you.
NOTE: You only have to match contributions for employees who are at least 21 years old, worked for you for three out of the last five years, and earned at least $650 for 2022 and $750 for 2023.
IRAs (Traditional & Roth)
The other retirement plans that YouTubers, influencers, and creators can contribute to is the Roth and traditional IRA. These retirement accounts are the easiest to open because they’re available to anyone with earned income.
In 2023, you can contribute up to $6,500 into an IRA (or up to $7,500 if you’re at least 50 years of age). It’s substantially less than what you could contribute to a solo 401k or SEP IRA, but you could also choose to contribute to an IRA in addition to a solo 401k or SEP IRA.
Regardless of if you have a solo 401k or SEP IRA, you should still open a traditional or Roth IRA anyways. It typically takes under 10 minutes to open an account and can be done completely online through Carry or your preferred provider.
Traditional or Roth IRA?
The main difference between a traditional and Roth IRA is how they’re taxed.
- With a traditional IRA, you make contributions with pre-tax income (money you haven’t paid taxes on yet) and it gets deducted from your taxable income for the year. For example, you could contribute up to $5,000 to a traditional IRA this year and your taxable income would get reduced by $5,000. Withdrawals in retirement are taxed as regular income.
- With a Roth IRA, you make contributions with after-tax income (money you’ve already paid taxes on) so you don’t get any tax deductions up front. However, your withdrawals in retirement are completely tax-free.
Note: A Roth IRA has income limits. If your income is too high, you cannot contribute to a Roth IRA. Learn more about Roth IRA income limits here.
Also read: Roth IRA Vs Traditional IRA: Key Differences & Similarities
Contribution limits across all of your IRAs are aggregated.
You can contribute to both a traditional and Roth IRA in the same tax year. However, the limits are aggregated across all of your IRAs, meaning your total contributions to all of your IRAs should not be more than the IRA contribution limit, which is $6,500 for 2023 ($7,500 if age 50+).
For example, if you contribute $5,000 to a traditional IRA, you would only have $1,500 in room remaining to contribute to your Roth IRA.
Conclusion
If you’re a YouTuber, creator, or influencer, the best retirement plan option is the solo 401k. It gives you the highest contribution limits, tax-free compounding, a Roth option, the ability to take a loan, and the most investment options.
However, to be eligible for a solo 401k, you must not have any employees besides your spouse. If you do have full-time employees, your next best option is a SEP IRA. While it comes without many of the best solo 401k features (like a Roth account), you’re still given a higher contribution limit than an IRA.
A Roth or traditional IRA has a much lower contribution limit than a solo 401k, but can be opened by anyone with an earned income. You can also make contributions to an IRA in addition to a solo 401k or SEP IRA.
FREE PDF DOWNLOAD
The Solo 401k Handbook
Everything you need to know in a handy ebook format.
Set up a new solo 401k in under 10 minutes
Contribute up to $69,000 and invest in any asset class with tax-free compounding†.
Anyone who makes money from a business, freelancing, or a side hustle is eligible, as long as you have no employees.
