401k for the Self Employed

Finding a 401k for the self employed may not be as easy as it is for people who work at companies that provide corporate 401k accounts. But Solo 401k plans are available for self employed individuals. Most self employed individuals are owners of small businesses. Solo 401k plans allow these business owners to shelter large quantities of money from taxes. These plans were created by the Economic Growth and Tax Relief Reconciliation Act of 2001. They have some great features that can really benefit investors. Consumers are encouraged to talk to their local financial advisor about these savings vehicles.

Advantages of Solo 401 Plans

There are many great advantages for self employed individuals to contribute to Solo 401k plans. As previously stated, they do provide a tax haven where small business owners can send some of their income and put it away for retirement. Contributions can be made from either pretax or post tax dollars, depending on the way the proprietor of the business gets paid and the way they want to set it up. This is great because some self employed individuals give themselves an actual paycheck with taxes taken out, while others simply pay all of their business and personal expenses from a single bank account.

Contributions limits for the Solo 401k plans created by the Economic Growth and Tax Relief Reconciliation Act of 2001 are much higher than they are for Keogh or SEP IRA plans. This is another great feature, especially for small business owners who are a bit behind getting their retirement funding together. They can put more in and get that balance up faster and allow their money to start working on their behalf.  However, not being aware of these contribution limits can be one of the serious errors in investing.

As an additional benefit, assets from other IRAs or other qualified retirement plans can be rolled over into these Solo 401k accounts. This is great for entrepreneurs who still have an old IRA from a previous employer that they've been meaning to close. And the terms of the Reconciliation Act also allow account holders to borrow from their retirement account in certain cases, another great benefit.

Eligibility for Solo 401k Plans

To be eligible to start and contribute to one of these plans, an individual must be a small business owner with no employees. If a company has co owners or spouses who work in the business, they are also eligible to participate. The age of the business is not an issue, either. Any small business that matches this description is eligible, even if it is brand new. Any business owner, an independent contractor with 1099 income, a sole proprietor or participant in a partnership, limited liability company or corporation can participate in these plans.

Self Employed 401k Contributions

Contributions to these plans can be made as after tax Roth contributions, which get taxed once and then are never taxed again; or as pretax contributions, which get taxed only when they are withdrawn. Participants in these plans can even make contributions of both varieties if they so choose. Maximum contributions to these plans are very high. They adjust every tax year based on inflation, so check with your financial advisor for up to date contribution limits information.

There are different restrictions on the maximum contributions account holders can make each year based on the type of business (i.e. sole proprietorship, LLC, or corporation) and the age of the account holder. People over 50 get special access to higher limits to help them make catch up contributions. The Solo 401k is an excellent investment vehicle that's well worth considering for anyone who owns their own business.

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