Retirement Accounts for the Self Employed (Part 2 of 5) – The Solo 401K

So for all you self employed folks out there, this week is for you!  I am laying out all of your retirement plan options in gory detail.  For everyone else, take the week off from reading.  Grab a beer.  Watch Heroes:)  The first installment of this series discussed the SEP IRA.  Part 2 of this series explores another popular option: the Solo 401K. The next two entries will describe the other options available to the self employed and the last entry will discuss what options are appropriate for you according to the kind of business you have and your goals!

Do I Qualify For A SOLO 401K?

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, LLC, partnership, or corporation.

Where Do I Set Up a SOLO 401K?

Fidelity and T. Rowe Price offer SOLO 401Ks or 401kBrokers.com.

How Much Can I Contribute Annually to a SOLO 401K for myself?

For the tax year 2007 you can contribute up to $15,500 plus 20% of your business income, with a maximum contribution of $45,000 in 2007. You can make an extra $5,000 catch-up contribution if you’re 50 or older.
 

Why Not Just Open a Traditional or Roth IRA?

Do Both!   

When Do I Set This Up?

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

What If I Already Participate In My (Other) Employers Plan?

If you have a regular 401(k) through an employer and have some freelance earnings on the side, then your solo 401(k) limits will be reduced by any contributions you’ve made to a regular 401(k). But that only affects the first $15,500 of contributions, not the 20% of business income. So if you contributed $10,000 to a regular 401(k) through your employer, for example, then your solo 401(k) contributions will be limited to $5,500 plus 20% of your business income.

Do I Have to Put Away the Same Amount of Money Every Year?

No!

What If I Have Employees?

If you have employees you are not eligible for a SOLO 401K unless it is your spouse.

Anything Else?

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. 

Summary 

If work for yourself take full advantage of the tax benefits that affords you! A Solo 401K allows you to defer a significant portion of your retirement savings from taxes. Don’t let Uncle Sam get more than his fair share!

In the next installment of this series (Part 3 of 5) I will describe another kind of retirement account for the self-employed – The SIMPLE IRA!

Other great blog entries on Solo 401Ks:

http://www.mymoneyblog.com/archives/2007/10/fidelity-self-employed-401k-account-review.html

http://www.my-personal-finance-blog.com/2006/12/28/set-up-my-solo-401k/

http://taxplaya.typepad.com/tax_playa/2007/03/selfemployed_40.html

For the last article:

https://daseducation.wordpress.com/2007/10/08/a-retirement-accounts-for-the-self-employed-part-1-of-5-the-sep-ira/

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4 Responses to “Retirement Accounts for the Self Employed (Part 2 of 5) – The Solo 401K”

  1. A Retirement Accounts for the Self Employed (Part 3 of 5) - The Simple IRA « Dollars & Sense Education Says:

    […] & Sense Education on Retirement Accounts for the Self Employed (Part 1 of 5) – The SEP IRARetirement Accounts for the Self Employed (Part 2 of 5) – The Solo 401K « Dollars & Sense … on Retirement Accounts for the Self Employed (Part 1 of 5) – The SEP IRAA Retirement Accounts […]

  2. Retirement Accounts for The Self Employed (Part 5 of 5) - What Is The Best Plan For You? « Dollars & Sense Education Says:

    […] for the Self Employed (Part 3 of 5) – The Simple IRA « Dollars & Sense Education on Retirement Accounts for the Self Employed (Part 2 of 5) – The Solo 401KA Retirement Accounts for the Self Employed (Part 3 of 5) – The Simple IRA « Dollars & […]

  3. Janet Says:

    You should mention that Solo 401k’s have much higher start-up costs and stricter filing requirements than the SEP IRA. You’ll have to file an annual tax return for your Solo 401k. My husband is just starting out as a commercial real estate broker. His income is low now, but should be in the six figure range within a few years. After reading this article and weiging our options, we decided to start with a SEP IRA for now, due to the lower start-up costs. Later, we’ll roll it into a Solo 401(k) when he wants to maximize his contribution potential.

  4. Lawrence gRoves Says:

    Janet:
    Your husband might consider investing in real estate with his retirement funds as he has the foreknowledge of the best deals on the market The problem with the SEP-IRA is that Real Estate investments may be subject to the infamous UBIT ( unrelated business income tax) whereas with a Solo 401k , there is no UBIT.


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