I have a side business but also work for an employer during the week. Can I save money I make with my side business in my work 401(k)?
Answer:You should really keep those ‘buckets’ of savings separate. And there’s actually an easy way to do this, assuming your side business is comprised of just you: Use a ‘Solo 401(k).’
A Solo 401(k) is basically just as it sounds. It’s a 401(k) plan specifically designed for self-employed folks who don’t have any employees (the IRS calls it a one-participant 401(k)). With this type of plan, you play the role of both the employerandthe employee, so your contribution limits are higher than a standard 401(k): In 2021, you can contribute up to $58,000, or, if you’re age 50 or older, you can contribute up to $64,500.
However, there are some tricky rules around earned income and compensation when you contribute as the ‘employer,’ so we highly recommend consulting with a tax professional or a fiduciary financial advisor if you decide to open one. Most brokerage companies and mutual funds companies offer Solo 401(k)s, but fees vary. You’ll also need a federal tax ID number (if you don’t have one, apply for free viairs.gov).
And here’s something else someone in your situation needs to keep in mind: Contribution limits for any type of 401(k) plan areper person(not per plan). This means that if you’re saving in your work 401(k)andin a Solo 401(k), the most you can contribute as an ‘employee’ this year is $19,500combined(or, $26,000 if you’re 50 or older). So, for example, if you’re 48 and save $10,000 in your work 401(k), you can only save up to $9,500 in your Solo 401(k).
The Simply Money Point is that a Solo 401(k) is a great way for anyone with a side gig to set aside some of that income for retirement. If you’re looking for tax-free growth, a Roth Solo 401(k)s is also an option. Just be sure you’re carefully following the contribution rules no matter which you choose.