A 401(k) Plan for Self Employed Individuals

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You did it! You quit your job and started that small business that had always been your dream! Exciting times, thrilling ups & downs, you are your own boss--but wait, you do miss the paychecks that arrived regularly every other week. You also miss the medical benefits that the company paid for & that retirement plan you contributed to. What’s more, you also miss that extra oomph on your paycheck-the employer contribution to the company 401(k). 

In my series on Employer Retirement Plans for Small Businesses, let’s first examine the Individual 401(k). This is also known as the Solo 401(k). Unlike other retirement plans, a solo 401(k) is only for sole proprietors or S Corps who have no employees. A spouse can contribute if he or she earns income from the business.

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It comes in both the traditional & Roth version. Just like IRA’s, Traditional is money put away pretax & is taxable when withdrawn. The Roth 401(k) is funded with after-tax dollars & is tax free when withdrawn. One can also split the contributions between the two. Loans can also be taken against savings in 401(k)’s.

Why I like these plans?

• They are ideal to sock away large amounts of money in the good years.
• It helps you save both as an employer & an employee. Here’s how for 2013- you can contribute a maximum of $33500 (Up from $33000 in 2012) as an employer AND $17500 (Up from $17000 in 2012) as an employee- not to exceed a maximum of $51000 (Up from $50000 in 2012) or 100% of the employee’s compensation, whichever is lessor.
• All 401(k) plans allow for catch-up contributions for those 50 years or older. The amounts are $5500 in 2012 & 2013.
• Employee deferrals are immediately 100% vested.

What Are Your Investment Options?

The Investment options are up to you & your financial planner. 

• As owner & trustee; your responsibilities towards an Individual 401(k) are both

  

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  basic & fiduciary. 
• Basic as in the business decisions that need to be taken to keep the plan & employer contributions to be made, not to engage in prohibited actions, filing the required forms with the IRS. 
• Fiduciary, when you act in a position of trust, to hire someone or manage the plan yourself.

Stay informed & know your responsibilities! Or best yet, engage a Tax Professional to take care of the intricacies for you, and help you decide which is the best Retirement Plan for your Small Business.  

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Please read my disclaimer here. For more questions regarding this and other matters, I can be contacted at manasa@mntaxsolutionsllc.com.