Sean Mullaney - Solo 401(k): The Solopreneurs Retirement Account

Copyright 2022 Sean Mullaney

All rights reserved. No part of this publication may be reproduced, distributed, or transmitted in any form or by any means, including photocopying, recording, or other electronic or mechanical methods, without the prior written permission of the author, except in the case of brief quotations embodied in critical reviews and certain other uses permitted by copyright law.

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ISBN: 979-8-9864489-1-6 (paperback)
ISBN: 979-8-9864489-0-9 (ebook)

Dedication

To my fellow solopreneurs trying to save for a better tomorrow.

B efore we get going on the Solo 401(k), there are some caveats to keep in mind as you read this book.

First, this book is for educational and entertainment purposes only. It is neither tax advice, legal advice, financial advice, nor investment advice for any particular person. You will notice the book provides many examples of potential tax or financial outcomes. Each example considers only a small slice of the tax and/or financial picture of a hypothetical person. None of the examples consider all the relevant tax and financial information in your case or in the case of any other person.

Second, as excited as I might be about the Solo 401(k), it must always be remembered that goals are more important than tools. The Solo 401(k) is not a goal; it is simply a tool. Financial goals can include financial independence, legally reducing lifetime total income taxation, and retirement by a certain age. The Solo 401(k) can be a great tool in achieving all of those goals but must always be implemented in order to achieve an over-arching goal or goals. For some, the Solo 401(k) will not be a deployable tool. Thats okay.

Third, this book is not a substitute for your and your advisers own research and judgment regarding tax matters. While I endeavor to provide accurate tax information, considering the complexity and sheer volume of federal and state tax codes, regulations, cases, and other authorities, there can be no guarantee that this or any other tax publication will always be entirely accurate. Further, there are ambiguities in the tax law. The IRS, state taxing authorities, and/or courts could disagree with my perspective on particular issues, and the tax law does change over time. The reader should be aware of these facts.

The author shall not have any liability or responsibility to any person or entity with respect to any damage or loss caused (directly or indirectly) by the information contained in this book.

Nothing in this book is an endorsement of any particular Solo 401(k) provider. To help educate the reader, the book occasionally discusses certain features of particular providers Solo 401(k) plans. Such discussions are not to be interpreted as an endorsement or recommendation to use any particular financial institution for ones own Solo 401(k).

As a rounding convention used throughout the book, all cents in all calculations are rounded to the nearest whole dollar amount. Examples should be read in light of the rounding employed. Sometimes there are multiple calculations that build on top of each other, and thus there is some rounding on rounding.

All examples used in the book use hypothetical people who are U.S. citizens who live and work in the United States.

Finally, the opinions expressed herein are solely those of the author. They are not the opinions of the authors current or former employers.

I f you are of a certain age, you might remember Ron Popeils sales pitch for the Showtime Rotisserie & BBQ. Making dinner was as easy as set it and forget it.

In my first career, I had the good fortune of W-2 employment for the Internal Revenue Service and Big Four accounting firms. At these large employers, I had access to the Thrift Savings Plan (at the IRS) and large 401(k) plans. I had no need to establish a retirement plan. Rather, I could go to a web portal, pick where I wanted my money invested, elect how much of my paycheck I wanted to save, and I was done.

My workplace retirement plan was to set it and forget it.

Starting my second career as a financial planner, I became self-employed. No one from HR sends you an email asking you to set up your retirement plan when you are self-employed. Theres nothing to set and forget.

But does that mean the self-employed dont have retirement plan options? Absolutely not, but none of the options are quite as easy as set it and forget it.

The self-employed face three significant obstacles in their financial lives.

First, being self-employed is a great way to pay a ton of taxes to Uncle Sam and state taxing authorities. Subject to both the income tax and the self-employment tax, a solopreneurs self-employment income often suffers a higher tax rate than employee W-2 income and other kinds of income, such as interest, dividends, capital gains, retirement plan distributions, and Social Security. Ouch!

Second, saving for retirement is a challenge when you are a solopreneur. Running ones own business is its own significant undertaking. With running your actual business, advertising it, keeping up with clients, and the millions of other things you have to do, who has time for retirement planning? Layering in saving for ones own future while self-employed greatly increases the degree of difficulty involved in the financial lives of solopreneurs.

Third, have you seen a tax return? There is plenty of complexity when it comes to being self-employed. Folding retirement savings into that mix amps up the complexity and confusion.

These are three big problems facing millions of Americans who, like me, run their own small businesses. Wouldnt it be great if there were one tool available to solopreneurs that helps them reduce their taxes and build up retirement savings?

It turns out there is: the Solo 401(k).

Ill admit it. The Solo 401(k) excites me. As a tax-focused financial planner, I truly enjoy thinking, talking, and writing about retirement saving and tax reduction. Not only do I advise clients on Solo 401(k)s as a financial planner, but I have one myself. I believe the Solo 401(k) represents a unique tax planning opportunity for many self-employed individuals and side hustlers.

In todays tech-enabled world, I believe we will see a rise in entrepreneurship. For an increasing number of entrepreneurial Americans, the Solo 401(k) will comprise a significant portion of their retirement savings and a primary method of legally reducing tax liabilities.

The world continues to change, and much of that change involves shifts away from traditional, full-time employment. For example, a 2019 Bankrate survey reported that 45% of working Americans had a side hustle. Since 2020, more Americans have started their own businesses because either they had to when they lost their jobs, or they discovered an appreciation for the flexibility offered by full-time self-employment or a side hustle.