When do you expect to retire? Maybe age 65 or later? Think again.

On average, most Americans leave work just before the age of 60. There are a variety of reasons. Health is one, but plain old downsizing happens too.

In fact, half of workers nationwide over the age of 50 are pushed out the door against their will, according to one study.

What can you do if you find yourself shown the door a decade before you had planned? The good news is that some companies seem willing to hire experienced people as consultants or on a contract basis.

The better news is that you can keep your retirement planning on track thanks to a little-known tax law that allows anyone to create their own, personal 401(k), often referred to as a “solo 401(k)” plan.

As it turns out, solo 401(k) plans are cheaper to run and more flexible than most corporate-run plans, and the amount you can contribute into them is much more generous.

Easy to create

Congress created the solo 401(k) in 2001. The law allows sole proprietor business owners with no employees (other than perhaps a spouse) to act as their own plan administrator.

These plans are very easy to create, just call up Fidelity Investments or Schwab and ask for one. The administration is minimal. All you really have to do is remember to contribute to it.

A solo 401(k) otherwise works just like a regular workplace 401(k) in terms of the annual contribution limits. For 2019 that’s $19,000 a year if you’re under the age of 50 and $25,000 if your 50 or older, thanks to the $6,000 “catch-up provision.” These limits typically rise year to year.

Here’s the brilliant part: In addition, you can contribute up to 25% of your net income from the business, which is your income minus half your self-employment tax. (There are various other minor adjustments, so consult a tax professional first time around.)

Yes, you have to make money. But you can sock away a lot, too. The current absolute ceiling in dollar terms is $56,000, and up to $62,000 if you use the catch-up.

In effect, since you are self-employed you get to contribute as the employee and as the employer. It’s pretax, so your income taxes each year will be lower. Technically, it’s possible to defer your entire compensation.

What’s more, you’re the boss, literally and figuratively. That means you get to choose the investments in your own plan.

Of course, the best way to grow your savings is to use very low-cost index funds instead of fee-heavy actively managed funds.

Most company 401(k) plans are far too expensive thanks to active mutual fund fees and costly plan fees on top of that. Many workplace plans have triggered lawsuits over expensive funds and plan fees that cut into returns.


As the business owner you get to make that call. It might sound a tad unnerving, but the opposite is true. It’s never been easier and cheaper to make good investment choices.

The end result is that you can cut the cost of a personal 401(k) to a fraction of what you likely paid, unwittingly, at your last full-time job. Rather than buying a pile of pricey, possibly mismatched mutual funds, you can build a simple portfolio of index funds at a 70% lower cost.

Fiduciary management of your retirement money is a good idea, and you may want to hire someone who can oversee the rebalancing, help with low-cost fund selection and offer financial planning, but even the cost of those services has dropped dramatically.

Yes, getting laid off in the last decade of a career is a bummer. But it happens. For some, it can be a chance to create something new, vibrant and rewarding after decades of building professional know-how.

In light of National Entrepreneurs’ Day this week, now is a great time to learn more about this tremendous tax benefit offered to self-employed professionals.

It can be highly financially rewarding to set out on your own, whether that’s a choice or a fact of your life. If you do, don’t forget to step up and take charge of your own retirement planning, too.

This article was originally published by MarketWatch on Nov. 19, 2019.

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