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Solo 401(k) Offers Long-Term Savings

As a small business owner or independent contractor, you may be jealous of the tax advantages associated with the retirement savings plans offered by large companies and organizations

By: JP Dahdah

By: J.P. Dahdah

 – even those with only a handful of employees. If you’re the type of person who prefers to be independent or perhaps have started some kind of small business, there’s no doubt that you want the same benefits as big business 401(k) plans, but don’t want to deal with the complex rules and administrative expenses associated with them.

As a single business owner without employees (i.e. Real Estate Agent), consider a Solo 401(k) over some of its popular cousins, including SEP, SIMPLE, or Profit Sharing plans. Popular names for these plans include “Uni-401 (k),” “Individual 401(k),” or “Single participant 401(k),” but regardless of what they’re called, a Solo 401(k) gives owner-only businesses the advantages of a traditional 401(k) – including higher contribution limits and the ability to borrow from the plan at a relatively affordable price.

Contribution Limits Vary

The rules governing Solo 401(k) plans apply to incorporated and unincorporated businesses. Any business that employs only the owner (and his or her spouse) qualifies, including C corporations, single-member Limited Liability Companies, sole proprietorships and partnerships. The higher the contribution limit, the larger the tax break, although combined contributions for salary deferrals and profit sharing may not exceed the lesser of 100 percent of compensation or $49,000 for 2009. Under catch-up provisions, that limit is $54,000 if you will be age 50 by the end of the calendar year.

The employee may make a salary deferral contribution up to $16,500 ($21,500 if the catch-up applies). Employer contributions are limited to 25 percent of employee compensation. Together, these contributions may not exceed the lesser of $54,000, or 100 percent of compensation. Note that there is no catch-up for employer contributions.  Considering the two-part contribution structure, contributions can amount to a very nice sum every year.

Other Considerations

A Solo 401(k) gives you the flexibility to save more in years when you are doing well and hold back in less profitable ones. For example, your business might boom in some years and bust in others, but no matter the circumstances, you control whether, and how much, to contribute to the plan.

If you include plan loans as a feature of your Solo 401 (k), you can generally take a tax-free loan from your plan. However, loan limits and repayment terms are mandated by IRS rules, and no deviations are allowed. In addition, a Solo 401(k) plan can permit rollover contributions, making it an attractive planning tool if you are thinking about leaving a corporate position to start your own business. For calendar-year companies, your Solo 401(k) accounts must be established by December 31 of the year in which you want to claim a tax deduction, and contributions must be made within a very short time after year end.

In conclusion, Solo 401(k)s offer an array of notable advantages, including higher contribution limits, loan provisions and flexibility. Take control of your retirement plan today with a Solo 401(k) plan!

J.P. Dahdah is President of Entrust Arizona. Serving the state of Arizona.

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