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Highlights of the Self-Employed 401(k) Plan - The Basics Explained

Thanks to new rules from the Tax Relief Act of 2001, it makes sense for small businesses – whose only employee is the business owner or the owners and their spouses – to open and contribute to a Self-Employed 401(k) plan. While most retirement plans provide a tax break and help save for the future, the Self-Employed 401(k) offers additional benefits such as:

	Complete contribution flexibility – You decide each year whether to contribute and how much to contribute.
	Higher contribution limits – Your tax-deferred contributions can be up to three times as much as what's allowed under some other types of retirement plans.
	Easy set-up and inexpensive to maintain – Unlike larger 401(k) plans, there are no complicated administrative requirements to bother with.
	Consolidation convenience – You can consolidate assets from your traditional IRA or other retirement plans into your Self-Employed 401(k) .
	Access to cash via the 401(k) loan option - You can get a loan of up to the lesser of $50,000 or one-half of your Self-Employed 401(k) account balance. The loan can be used for any purpose and the loan is tax free and penalty free as long as it is paid back on time.

Any type of business with no employees, can establish an individual 401(k) plan – generally referred to as a Self-Employed 401(k) , or Solo 401(k) . The business can be brand new or old. It can be a sole proprietorship, LL.C, partnership, or corporation.

Each Self-Employed 401(k) must be set up no later than December 31, to be eligible for tax deductions for that tax year...

Just because your business is a one-person administration, doesn’t mean you can’t have a self-employed 401k plan of your own. A Solo 401k plan allows a self-employed business owner with no other employees other than a spouse to participate in a structured retirement plan.

Any sole proprietor, partnership, corporation, or S Corporation qualifies for a self-employed 401k plan. If you own a business, you can contribute the lesser of $42,000 or 100% of total compensation into a Solo 401k plan. Self-employed business owners 50 years or older can take advantage of a catch up provision that allows an additional $4,000 of contributions per year. Participants can also defer a maximum compensation of $14,000 plus 25% of total profit sharing into the plan.

A self-employed 401k plan like the Solo 401k allows high contribution limits, relaxed rules, and virtually no administration, including costly discrimination testing. If you previously held an IRA or other 401k plan before starting your own business, you can rollover into a Solo 401k . You can also select to decrease or stop contributions completely at any time.

Keep in mind that the eligibility requirements for having a self-employed 401k plan are quite strict. It’s not widely offered by most investment companies and those that do offer it provide limited investment options. And once you add a single employee outside of your spouse, you must convert to a traditional or SIMPLE 401k plan.


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