By |Published On: Dec 7, 2021|Categories: Entrepreneurship, Financial Planning|

One of my clients, Emily, asked, “How do I fund a 401(k) if I am an entrepreneur?” in response to last week’s email.

Savings Ideas for Entrepreneurs

As a business owner, you (and Emily) have lots of financial planning options to reach your financial goals. A Solo 401(k) might be your solution if you are a self-employed entrepreneur with no employees. You can contribute up to $19,500 as the employee and up to $38,500 as the employer, for a total of $58,000 in 2021. If you are 50+, you get an extra $6,500 as an employee catch up.

It’s a great way to save for entrepreneurs to save for retirement because it allows high contributions. Also, if there is an emergency situation in your life and you need money, you can take a loan from your Solo 401(k), but you cannot do this with an IRA.

Entrepreneurs can also save money by funding a Health Savings Account (HSA).  You can save pretax money for healthcare expenses, such as medical expenses (dental exams), copays, and medical products (eyeglasses).  The annual contribution for HSA’s is $3,600 (in 2021) for individuals and $7,200 (in 2021) for those with family coverage.

The balance in an HSA grows tax free.  Any dividends, interest, or capital gains earned are not taxable.  Withdrawals from HSA’s for qualified medical expenses are tax free. It’s a wonderful account and it would be fantastic if you can establish one as a business owner.

The balance in an HSA can be carried over from year to year.  There is no requirement to use it or lose it.  Furthermore, an HSA belongs to you.  So as an entrepreneur, if you decide to start a new company, the HSA moves with you.  An HSA is not owned by the company.

As an entrepreneur, what questions on how to set up a Solo 401(k) or an HSA?