Posts tagged business owner

The Ins and Outs of Solo 401Ks

One of the frightening things about launching your own business stepping away from your corporate sponsored 401k plan. Historically, the options available to small business owners for tax deferred retirement savings have been minimal.

But now, new options are available in the form of the solo (or, one-person) 401k plan. In the article below, we’ll provide you with an overview of what a solo 401K plan is, how it compares to other retirement options and additional resources for you to gather more information.

Solo 401K: The Basics
The solo 401k plan is suitable for businesses in which the owner or owners are the only employees.

This plan works in a situation where there are no common law employees. This means the plan can be used by the business owner, his or her spouse if working at the business, and any partners in the business and their spouses who work at the business. It could work well for businesses such as sole-practitioner professionals, partnerships, manufacturer’s representatives, small retail owners, freelance writers, computer consultants and electricians, to name a few.

Contributions to a solo 401k plan are based on revenue generated by your business. With a solo 401(k), annual contributions consist of two parts:

  1. You can contribute up to 100% of the first $15,500 of your 2007 compensation or self-employment income ($20,500 if you’ll be 50 or older at year-end).
  2. You can contribute and deduct an additional amount of up to 25% of your compensation income, or 20% of your self-employment income. This second part of your annual contribution is like what you can do with a traditional small-business retirement plan

You won’t be forced to contribute more than you can comfortably afford in years when cash is tight. You can always pay in less than the tax-law maximum or even nothing at all. In other words, the solo 401(k) lets you rack up major tax savings in the good years, while leaving you the option to contribute less (or zero) in the lean years, when conserving cash is your highest priority.

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