Individual 401k Plans, What Are They?

Individual 401k Plans (or solo 401k plan) are a 401k for small business owners who do not have any employees other then themselves and a spouse. If you own a business that fits this criterion you are in luck, because it does offer some pretty nice rewards.

The plan works similar to other 401k plans and allows you to contribute up to $16,500 into the plan every year before you have to pay taxes, just like traditional plans. However a solo 401k plan also allows your business to invest up to 25% of its revenue into the plan as long as your total contributions do not exceed $49,000 or $54,500 for the tax year.

For example if John owns a small business that made $120,000 last year he can contribute 25% of it or $30,000 into his solo 401k. In addition to this he can also contribute $16,500 as an employee, for a total investment of $46,500.

If john was 50 or older he could have added an extra $5,500 to catch up on retirement for a total investment of $52,000 invested in the year.

Obviously it does have a much higher limit then traditional 401k plans, and if you can invest the full amount it will be a major tax savings as well as a great way of saving up for retirement.

Solo Roth 401k Plans

Another benefit of individual 401k plans is that they give you the option of investing into Roth 401ks as well. The difference between a Roth 401k and a regular 401k is that a Roth 401k allows you to pay your taxes now, and pull out tax free money later, this includes any interest you have earned.

For a small business owner this can be huge! When you first start a business the income that it produces probably isn’t going to be as high as you would like it to be. As it grows however, your income, and your tax bracket will go up.

Why not pay your taxes now while you are still in a lower tax bracket and avoid taxes when your tax bracket is higher? It sounds like a fantastic idea to me.

Taking Money out Early

All 401k for small business owners allow you to take out loans and many even offer hardship withdraws which will allow you to take money out of your account early provided you meet a specific hardship and have no other resource to pay it.

Disadvantages of a Solo 401k Plan

Even though a solo 401k allows you to invest a lot of money each year there are some disadvantages to it. These include.

• Cost, a 401k is hosted by another company and they will charge you for the account

• A lot of Paperwork

• Growth, if you hire an employee you can no longer have a Solo 401k

• Limited Investment Options

Before opening a 401k for small business owners consider all the pros and cons. If you do hire employees you can still operate a plan, it will just be a more traditional 401k.

List of Individual 401k plans

If you decide that this is the best option for you then you will have to compare companies to see who charges the least and allows the most investment options. Here is a list of individual 401k plans to choose from.

Make sure that the company offers a plan that meets your needs before making the final decision. Some things to consider include.

• Withdrawal options

• Investment options

• Charges and fees

Return From Individual 401k plans to 401k information