Getting the most out of your 401k plan

Hi, I just recently quit my job to start a small business of my own. I’ve never really bothered too much about saving money, except for a few fixed deposits here and there. However, since I’m starting a business of my own, I’ve grown to be concerned about my retirement fund. While talking to a bunch of friends recently, I heard about 401(K) plans for small business owners. I wasn’t aware of a separate 401 (K) for self-employed people. Could you tell me more about this? I would like to know about the benefits of this particular 401 (K) plan.

– Richard Ortega

Hi Richard, great question. We definitely understand where you’re coming from and it’s a good thing that you’ve taken an interest in your retirement fund. Well, to start off, let me firs tell you that you are 100% right about the existence of a 401 (K) plan for self-employed individuals. Now, getting into more details, the 401 (K) Plan that you are referring to is known as a Solo 401 (K). Investment rules concerning Solo 401 (K) plans are pretty clear and direct. These plans can be operated by small business operators who have no employees or have their spouse registered as the only employee. Also, your contribution to the 401 (K) plan is not subject to your income.

You act as both, employer and employee, when it comes to a Solo 401 (K) Plan. You can make elective deferrals up to a 100% of the compensation, within the annual contribution limit. However, you need to be the primary participant in the plan. The contribution limit, as of 2014, has been raised to $ 17,500 and if you are over 50, it is $23,000.

As an employer, you are also allowed to make profit-sharing contributions. However, it must be limited to a maximum of 25% of compensation. As of 2014, the maximum amount is limited to $260,000. The total amount that can be saved in a Solo 401 (K), by both employer and employee combined, is $52,000. However, the limits are changed regularly by the IRS, depending on the inflation.

One of the better parts of having a Solo 401 (K) Plan is the amount of tax benefits you will receive. To begin with, your contributions are tax deductible and income tax is charged only when you start making withdrawals. Speaking of withdrawals, the rules are same as the ones that are used for traditional 401 (K) Plans. You are allowed a penalty free withdrawal as long as you are aged 59.5 or above. An earlier withdrawal will result in income tax payments and also, a 10% penalty. Once you reach the age of 70.5, you will be expected to take in minimum distributions from the Solo 401 (K) account. Failing to do so, will lead to a tax penalty.

Now coming to the drawbacks, we can only tell you that there are literally none. The only difficulty you might face is when you actually set up the plan.

To know more about Solo 401 (K) plans, do visit The website is a great place to learn everything you need to about 401 (K) Plans.

About Elliot Earl, Director, Pension Trade Association
Director, Pension Trade Association Founded in 1982, the Pension Trade Association [California Domestic Nonprofit Corporation #C1629080] is dedicated to helping workers save for their retirement through expanded coverage of 401k -type defined contribution pension plans.

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