Business Monday

Self-employed entrepreneur? The Solo 401(k) may be for you

When it comes to their work and interests, I have found that many Americans lead lives that are more creative, fascinating and “outside the norm” than they probably realize. In my work, I meet many successful local South Florida entrepreneurs and small-business owners, many of them millennials, who started out at every imaginable occupation: attorneys, physicians and consultants, fashion photographers and engineers, corporate vice presidents, and who made the successful transition to small-business owner. Some were born in South Florida, but many others became infatuated with the sunshine, lifestyle, international flavor and the comparatively lower cost of living.

I have found that the people who are the most creative, entrepreneurial and disciplined in their professional lives face the biggest challenges in saving for retirement, especially millennials and Generation Xers who are in their 20s or early 30s and are just starting along the entrepreneurial path. The self-employed architect, the store owner, the engineering consultant, the software developer, the jewelry designer, the website developer, the mortgage broker, the real estate agent — such people strive incredibly hard, take calculated risks every day, and achieve more satisfaction and fulfillment through their work than most of the people I know who are employed by corporations or businesses.

I’m not sure how clearly the government understands the plight of the independent self-employed entrepreneur, but the government does seem to get that such people need extra help when it comes to saving for retirement. The beauty of the Solo 401(k) is that it doesn’t just level the playing field: It actually gives the self-employed, especially the millennial or Generation Xer, a significant advantage in the game. The foundation of retirement investing is based off the concept of tax deferral. Tax deferral means that you can postpone taxes on any earnings you make on the money in your tax-deferred accounts. That means your money is growing each year without having to remove any funds to pay tax.

Self-employed people can now benefit from Obamacare and no longer need to rely on employer-based health insurance. But the incomes of the self-employed will probably always have ups and downs. The beauty of risk is that it comes with reward: Self-employed people like that empowerment. But a Solo 401(k) allows one to save more money than almost any retirement savings vehicle available to an employed person. So even if you can’t have consistency every year, you can save even more on your good years — a lot more. For 2016, you can put aside as much as $53,000 per year tax-free, or $59,000 if you are over age 50. And you can make your contributions in pretax or after-tax (Roth) dollars as suits your needs.

A self-employed person will always have capital and other expenses that chip away at gross income. But a Solo 401(k) allows you to borrow up to $50,000 tax- and penalty-free from yourself to pay for capital and other business or life expenses. And you not only pay back that loan at the lowest interest rate possible, but you add that interest payment to your own retirement savings plan: the definition of a win-win.

A Solo 401(k) plan is incredibly easy to establish and administer as well. There’s no annual tax filing or reporting required if your assets are under $250,000. There’s no cumbersome testing to administer. Set costs and annual fees are very low. You can use your local financial institution to hold the account.

Here’s another secret: The government wants us to save for retirement. In fact, the government has made saving (and accumulating) a lot of money for retirement incredibly advantageous and enticing. For once, the game is rigged in our favor.

The rules of the game, however, and the path to “victory” are unclear. That’s the reason why so many fail to win. Too many people do not even know what game is being played or how to take part in it. This is especially true for the millennials and Generation Xers. The thing with tax deferral is that, generally, the earlier you start, the greater the tax deferral power will be. This is exactly why it is a perfect time for South Florida millennial entrepreneurs to start saving for retirement and kick-start their tax deferral clock.

The Solo 401(k) is the most tax advantageous, investor-friendly, low-cost, and easy-to-operate retirement wealth builder for the South Florida entrepreneur or small business owner with no employees, and along with Obamacare, has made the transition from corporate America to entrepreneurship much easier and less risky.

Adam Bergman is a senior tax partner with the IRA Financial Group, LLC. He can be reached at