The Solo 401(k)- For A Decade A Good Option For The Self-Employed

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The Solo 401(k)- For A Decade A Good Option For The Self-Employed

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March 26, 2012

In the Gen X and Gen Y arena, I am seeing more and more people quit the corporate America lifestyle and venture into becoming their own business owner. This shape of a business owner can be a freelancer, consultant, or someone who actually starts up a brick and mortar operation. Many of these folks will ask questions about whether they should incorporate their business or not which I have discussed in other articles - View Here. Once they become profitable, they often ask which kind of retirement plan would suit them the best. For someone who is a business of just one, the Solo 401(k) has been around for about a decade and provides a great alternative to helping maximize your retirement contributions. Here's a little history on the Solo 401(k) and how it can be a smart money moves for your business.

The Solo 401k came about in 2002 after Congress passed Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). EGTRRA added some small paragraphs to the tax code that put forward the solo 401(K0 as the preferred retirement vehicle for those persons that were self-employed.

Before EGTRRA, a self-employed person had the ability to design a 401(k) plan just for themselves. However, there wasn't a particularly compelling reason to do this because the deduction limit for a 401(k) plan was identical to a SEP-IRA. Many small business owners set up plans like a SIMPLE IRA or a SEP-IRA because they are slightly easier to administer traditionally than 401(k) type plans.

The tiny paragraph in the EGTRRA changes basically says the employee contributions to a 401(k) plan do not count toward the deduction limit. Since most business owners I have met over the years are usually interested in maximizing all available tax deductions for retirement, a solo 401(k) plan became preferred to a SEP-IRA. If the plan is set up correctly, a small business owner can not only put away as the 'employee' up to $17,000 per year pre-tax, but you may be able to put away up to an additional $33,000 pre-tax here in 2012 to make a total pre-tax contribution of $50,000.

Self-Employed 401(k) Plans

(source: fidelity.com)

Self-Employed individuals and owner-only (and the owner's spouse) businesses and partnerships can save more for retirement through a 401(k) plan. Fidelity's Self-Employed 401(k) allows you to take advantage of this increased retirement and tax savings opportunity with a full range of investment options.

Tax benefits Tax-deferred growth, tax-deductible contributions, and pre-tax deferral contributions
Fees No set-up or annual account fee
IRS maximum contribution Salary deferrals up to $17,000 for 2012.
Catch-up contribution Salary deferrals up to $5,500 2012 (if age 50+)1
Profit sharing contribution Up to 25% of compensation, up to the annual maximum of $50,000 for 2012 plan year
Establishment deadline The deadline to open a new plan is December 31 (or fiscal year-end)
Administrative responsibilities Annual Form 5500 filing after plan assets exceed $250,000
Withdrawals Minimum required distributions starting at age 70½. 10% early withdrawal penalty if under age 59½ and no exceptions apply

It's important that you do your homework on making sure the calculations are done correctly and the plan is set up correctly so you don't contribute more than your allowed especially if you are self-employed. It's a good idea not to fly solo on this 401(k), and get the help of a professional financial advisor and/or account. The company you choose to set the plan up with will help you determine the type of investment you have in the plan, but they should very similar to a corporate 401(k) plan with many different types of mutual funds and/or a self directed brokerage account.

If you need help with this, feel free to e-mail me at ted@oxygenfinancial.net and make sure you get the right type of retirement plan to help you reach your goals here in 2012!

Written by:

Ted Jenkin, CFP®, AAMS®, AWMA®, CRPC®, CMFC®, CRPS®

Co-CEO and Founder of oXYGen Financial, Inc - The Leaders in Gen X & Y Financial Advice

Visit to www.oxygenfinancial.net to request a free consultation with the leading financial experts for people in their 20's, 30's, and 40's in the country.

Securities and Investment Advisory Services offered through NFP Advisor Services, LLC (NFPAS), Member FINRA/SIPC. Oxygen Financial is not affiliated with NFPAS. NFPAS does not provide tax or legal advice. This site is published for residents of the United States only. Registered Representatives and Investment Advisor Representatives of NFP Advisor Services, LLC (NFPAS) may only conduct business with residents of the states and jurisdictions in which they are properly registered. Therefore, a response to a request for information may be delayed. Not all products and services referenced on this site are available in every state and through every representative or advisor listed. For additional information, please contact NFPAS Compliance Department at 512-697-6000. PLEASE NOTE: The information being provided is strictly as a courtesy. When you link to any of the web sites provided here, you are leaving this web site. NFP Advisor Services, LLC makes no representation as to the completeness or accuracy of information provided at these web sites. Nor is NFP Advisor Services, LLC liable for any direct or indirect technical or system issues or any consequences arising out of your access to or your use of third-party technologies, web sites, information and programs made available through this web site. When you access one of these web sites, you are leaving our web site and assume total responsibility and risk for your use of the web sites you are linking to.

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Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. oXYGen Financial is not affiliated with Kestra IS or Kestra AS. Kestra IS and Kestra AS do not provide tax or legal advice. https://Bit.ly/KF-Disclosures

This site is published for residents of the United States only. Registered Representatives of Kestra IS and Investment Advisor Representatives of Kestra AS may only conduct business with residents of the states and jurisdictions in which they are properly registered. Therefore, a response to a request for information may be delayed. Not all products and services referenced on this site are available in every state and through every representative or advisor listed. For additional information, please contact Kestra IS Compliance Department at 844-553-7872.

PLEASE NOTE: The information being provided is strictly as a courtesy. When you link to any of the web sites provided here, you are leaving this web site. Kestra IS and Kestra AS makes no representation as to the completeness or accuracy of information provided at these web sites. Nor is Kestra IS and Kestra AS liable for any direct or indirect technical or system issues or any consequences arising out of your access to or your use of third-party technologies, web sites, information and programs made available through this web site. When you access one of these web sites, you are leaving our web site and assume total responsibility and risk for your use of the web sites you are linking to.