Digital Nomads Have a Great Opportunity to Save: How To Use a Solo 401k to Fund Your Nest Egg.

Digital Nomads Using the FEIE Are In a Great Position to Save For The Future!

Yeah.  I know.  A Solo 401k Plan even SOUNDS boring. Nothing about that sentence is, or sounds sexy or fun.  It’s what your mom/dad, or grandma/grandpa tells you all the time.

I hate that they are right.  You won’t feel it while you’re young and have the benefit of time.  If you have a few light years, no biggie.  You’ll make up for it next year.

If you don’t put some away, you will next year.

Bull.

Digital Nomad Lifestyle – Who I’m Talking About

I qualified the “type” of Digital Nomad this article addresses.  If you can, or do, take advantage of the Foreign Earned Income Exclusion, you need to read this article.  The tax savings from using the FEIE can be used to fund a Solo 401k account.

What a great idea Jerry!  Tell me more!

Tax-Saving Strategies for Digital Nomads

Consider The Tax Problems Your Country of Choice May Reveal

Two things.  Does your country have a tax treaty with the US?  At a minimum, any income tax paid to your countries taxing agency will qualify for a foreign tax credit.

Second thing.  Does you country have a Social Security Totalization agreement?  This is a biggie.  As the name implies it deals with each countries social security program.  If your country of choice doesn’t have an agreement with the US, you will most likely be paying into the social security program of both the US and your foreign choice.

The biggest issue with this is if you can qualify for the foreign countries social security benefits.  In the US you must pay into the system for forty (40) quarters.  That’s ten years.  If you stick around for a few years before moving on tot he next country, you may never see any benefits, not to mention the constant updating of addresses (some states will call you a resident if you have an address is their state) and tracking of payments you’ve made to the various countries.

Plan So You Can Take The Foreign Earned Income Exclusion (FEIE)

This is the key to this strategy.  If you take advantage of the FEIE in 2023, you will exclude $120,000 of income.  If you can take advantage of the Foreign Housing Deduction, you can reduce your taxable income by another $36,000.

That’s around a $28,000 tax savings for a single taxpayer.

Digital Nomads = Self Employed = Business Deductions

As a Digital Nomad you must keep meticulous records regarding your business deductions.  You may be able to take advantage of deductions state bound business owners generally do not enjoy.

With the transient nature of being a Digital Nomad and if your blog/vlog/channel/website involve travel or exploration themes, you will have more travel and entertainment costs.  Digital Nomads also have a much higher than typical technology costs.

Why Do A Solo 401k as a Digital Nomads

.This is subjective.  This is my Dad opinion.  With the ability to make a good to great income, the ability to shelter up to $120,000 of income in 2023, and the ability to deduct expenses most of us can’t, there is cash available to further reduce your tax AND sock away a nice piece of change.

This is where the Dad opinion comes in.

Even if you only do a little.  Maybe put $10k away.  Do this for five years.

And don’t touch it.  That’s the key.  Leave it the f&ck alone.

If you leave it for 25 years and let it grow (we’ll assume 5% per year) you’ll have almost a quarter million dollars.  From a $50k investment over 5 years.

You’ll thank me later.

Why a Solo 401k Plan?

I’m a huge fan of Solo 401k’s for self employed taxpayers and husband/wife partnerships (or S Corps.)

A Solo 401k is actually a combination of two different retirement plans.  It’s a fusion of a SEP (Simplified Employee Pension) and a 401k plan.  This plan is specifically for the self-employed (and husband/wife teams).

For 2023 you are allowed to contribute the first $22,500 of your income towards the 401k portion of the plan.  The SEP calculation is based on your net self-employment income.  I use 20% as a rule of thumb (it’s close enough to estimate).  The sum of the two plans cannot exceed $66,000.

If you are over 50, you can add an additional $7,500 with a “catch-up” contribution.

Solo 401k Tax Savings

Making the maximum contribution will reduce your income tax.  It doesn’t reduce your self-employment tax unfortunately.

To maximize your tax benefit, you need to be making a lot.  Calculating in my little brain you would need net self-employment income of around $160k to see decent tax savings.

Have a discussion with your tax preparer about the level you are comfortable with.  Approaching this from the other direction, tell your tax person what your liquidity allows and they can come up with a few options.

Flexibility and Control Over Investments

These plans provide autonomy in selecting diverse investment options, empowering digital nomads to tailor their retirement portfolio according to their risk tolerance and long-term goals.

How a Solo 401k Works

A Solo 401k is a  combination of two retirement plans.  A (pseudo) 401k plan, and a SEP plan.

401k contributions are usually taken from your paycheck, but this type of 401k plan can also ber taken directly against all income, with the calculation based on net self employment income.  The takeaway from this is you don’t need to be on payroll.

This means $23,000 and potentially another $7,500 in catchup contributions if older than 50, can be contributed as a 401k contribution as a sole proprietor as long as net self employment income is as least $30,500 (using 2024 limits).

After the 401k contribution, you would now calculate the SEP component.  For purposes of this article, we’ll use 20% of self employment income as the contribution amount (the actual calc is 25% of NET self employment income, which is another calculation).

As you can see, there is an opportunity to put a large amount away for retirement and save a bunch on taxes at the same time!

Creating a Budget and Savings Plan

The flexibility of a nomadic lifestyle demands a structured budget and a dedicated savings plan, aligning financial goals with the unpredictability of remote work.

Do You Need Professional Help?

When dealing with taxes as an Expat, I will always suggest you find someone versed in Expat taxes, and someone who understands the foreign tax code of your country of choice.  If the country in which you established residency doesn’t have a Totalization agreement, you’ll really need someone.

With regards to investment advice, I wouldn’t recommend trying to self direct a Solo 401k.  I don’t think you can, so you will need to find a financial advisor.

Conclusion: Digital Nomads and Solo 401k Plans

As a true Digital Nomad, you have an opportunity to make a lot of money.  With so many ways to monetize your content, it’s not unusual to see a digital warrior making well over $20k per month.

Add in the benefits given to anyone working outside the US for an extended period (years) and you can be in a great cash position.

Use that power to further reduce your tax liability AND put money away for that cheezy rainy day.

Digital Nomads have been given an opportunity to do something most US Citizens will never have.  You are being given free money.  I’m going the Dad route and advising you to put this money away in a retirement account.

The savings from the Foreign Earned Income Exclusion and the Foreign Housing Deduction can be substantial.  I’m talking about $40k in tax savings if you only take advantage of the FEIE and the Foreign Housing Deduction.

Plus, depending on the type of “Nomad” or influencer you are, you may have an opportunity to write off some of your living and travel expenses.

All in all, you have a chance to save a lot in taxes AND put away for the future.  Taking advantage of the current tax laws as a Digital Nomad seems like a no brainer to me.

As always, let me know if you have questions.  Have a great new year and stay cool.

JKC