If you own an incorporated business, and you're the only employee, you may want to investigate the individual 401(k), sometimes called a solo 401(k). Like other 401(k)s, these plans allow you to defer salary up to the maximum allowed by law—$15,500 in 2008—plus the annual catch-up contribution of $5,000 if you're 50 or older.
In addition, your business, as your employer, can contribute up to 25% of your earnings. The combined cap is $46,000 in 2008, plus the catch-up contribution of $5,000 if you qualify to take it.
In contrast, if you've established a SEP-IRA—another retirement plan that's available to sole owners and other small businesses—you can't defer salary or make a catch-up contribution, though your company can contribute up to 25% of your earnings to a cap of $46,000.
An individual 401(k) may offer several other advantages as well:
- It is relatively inexpensive to set up and administer.
- It allows rollovers from other qualified plans and tax-deferred traditional individual retirement accounts (IRAs), so you can consolidate your retirement assets and invest them as you see fit.
- With most solo 401(k)s, you can take a loan from your account, which isn't possible with a SEP-IRA or regular IRA.
- Since there aren't other participants, except possibly your spouse or business partner, there are no testing requirements to demonstrate that the plan is being administered fairly.
You can compare the plans that are available by conducting a Web search for individual 401(k) sponsors.
| A 401(k) for the self-employed? If you're self-employed but haven't incorporated your business, you're still eligible to set up a solo 401(k), defer salary, and make an additional contribution. The only difference is that you're limited to adding 20% of your compensation in addition to your salary deferral. The cap is $46,000 in 2008 plus an annual catch-up contribution of $5,000 if you qualify by being 50 or older. |
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