401k Retirement Plans for Self Employed (Solo) Persons
If you own a small business where you are the employee or you and your spouse manage the business, then a solo 401k self employed retirement plan is a good retirement choice. Thanks to the Tax Relief Act of 2001, owners of self employed or solo 401k plans have the following advantages:
1) 100% Contribution Choice: You can contribute however much you want per year.
2) Higher Contribution Limit: You can contribute more funds than any other 401k account e.g a Roth IRA, traditional 401k, etc.
3) No maintenance: Solo 401k accounts are very easy to start up and do not require the services of a 401k administrator (which can be costly).
4) 401k Loan Service: If you need money for an emergency, you can take out a 401k loan of a maximum of $50,000 (or 1/2 of your solo 401k account reminder balance).
Characteristics of a Solo or Self Employed 401k Account
- Any type of business, whether a sole proprietorship (1 owner), partnership (multiple partners) or corporations (lots of shareholders) can open a solo 401k account.
- In order to be eligible for tax deductions in example the year 2005, you must setup the 401k account within that year (December 31st), no later.
Payments & Contributions to a Solo 401k Account
You can make contributions to your solo 401k account in 2 different contribution payments:
Hypothetical Solo 401k Investor Examples (for 2006)
1) Corporate Employee
Imagine the company you work for paid you $90,000 this year as your compensation.
If you are more than 50 years old, you are allowed a further 401k catch up contribution limit of $5000. Therefore, your total contributions for 2006 would be $37,500 + $5000 = $42,500
2) Sole Proprietorship
If you are more than 50 years old, you are allowed a further 401k catch up contribution limit of $5000. Therefore, your total contributions for 2006 would be $31000 + $5000 = $36,000
Here's a graphical representation of the above data: