Self Employed 401k Plan or Solo 401k Plan

A self Employed 401k plan ( Solo 401k Plan ) gives small business owners the ability to create a tax free retirement account. It does have some similarities and some major difference when compared to a traditional 401k.

Like regular 401k plans you cannot withdraw before age 59 ½ without having to pay both a 10% penalty and taxes on that money. This is unless you qualify for certain hardship requirements. The amount you can deposit annually is also the same (16,500 for 2009).

But unlike traditional 401k plans you can also set aside up to 25% of your income into the plan as long as your total investment does not go over $49,000 or $54,500 if you are over the age of 50.

So for example say you made $100,000 last year, you can deposit $25,000 plus the $16,500 for a total of $41,500. And as long as your total investment is under $49,000 you are within the rules.

Another interesting fact about solo 401k plans is that you can deposit money into them while depositing into a regular 401k as long as your total deposits do not exceed $49,000. This makes it really attractive if you are working and have a business on the side.

Setting it Up

A self employed 401k plan is the most powerful retirement plan offered to the self employed because it can allow you to invest more money than other investment plans.

In order to qualify you must own a small business that makes money and has no employees. There are a few exceptions to this rule, for instance your spouse may work for the company and there are certain rules that apply to part time workers. You can set the plan up at nearly any large financial institution. Just be warned it can be a lot of paperwork to manage.

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