Why An Individual 401k May Be The Best Retirement Plan For Small Business Owners

If you’re self-employed or own a small business, you’ve probably considered establishing a retirement plan. If you’ve done your homework, you likely know about simplified employee pensions (SEPs) and savings incentive match plans for employees (SIMPLE) IRA plans. These plans typically appeal to small business owners because they’re relatively straightforward and inexpensive to administer. What you may not know is that in many cases an individual 401(k) plan may be a better deal for you. An individual 401(k) plan is worth considering if you’re looking to set up your first retirement plan or increase tax-preferred savings.

What is an individual 401(k) plan?

An individual 401(k) plan (also known as a solo 401(k)) can be implemented only by self-employed individuals or small business owners who have no other full-time employees (an exception applies if your full-time employee is your spouse). If you have full-time employees age 21 or older (other than your spouse) or part-time employees who work more than 1,000 hours a year, you will typically have to include them in any plan you set up, so adopting an individual 401(k) plan will not be a viable option. What makes an individual 401(k) plan attractive?
  • Contribution levels can generally be higher than SEP or SIMPLE
  • The employee part of your contributions can be designated as Roth or traditional regardless of income level
  • Easy to set up at most discount brokerages without a lot of extra costs
With an individual 401(k) plan you can elect to defer up to $16,500 of your compensation to the plan for 2011 as either Roth or traditional contributions ($22,000 if you are age 50 or older by the end of the calendar year). In addition, your business can make a maximum tax-deductible contribution to the plan of up to 25 percent of your compensation (slightly less than that if you are a sole proprietor or unincorporated). There are other details to be aware of, so consult your tax or financial advisor prior to establishing a plan.

About the author

Jean Keener, CRPC®, CFDP®

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