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The Independent 401(k) Plan

Money Manager | Monday, August 30th, 2010

Independent 401(k) plans, which are sometimes referred to as a solo 401(k), are designed for one individual who is operating a sole proprietorship. These plans can also be used when a person is operating a small business with their immediate family member or their spouse. They are allowable under these circumstances in the case of a partnership, limited liability partnership (LLPs), corporations, S-corporations, and limited liability companies (LLCs), in addition to sole proprietorships. These plans can work if a person works as a contractor, consultant, independent real estate broker, or an entrepreneur, just to name a few possibilities. These plans can also work for individuals who have a regular wage job with a corporation, but have their own individual business or freelance work that they do on the side. Having an independent 401(k) plan for their individual solely owned business can be an effective way to save additional retirement money as well as save money on the taxes. Just as is the case with a standard 401(k) plan, there are limits to what can be contributed to an independent 401(k) plan. However, because the person contributing to the plan is also the owner of the company, they can also make a contribution as the employer.

What are some of the features of an Independent 401(k) plan?

While some of the features of an independent 401(k) plan are similar to standard 401(k) plans, they also have similarities to an SEP IRA or a Keogh plan. If the person contributing to the plan is over the age of 50, they are permitted to make catch-up contributions, just as is the case with a standard 401(k) plan. These plans can be useful for allowing a sole proprietor to save money in taxes, since the contributions they make to the plan as the employer for the company are also tax deductible. Over time, this can save a sole proprietorship a good deal of money.

What are the advantages of an independent 401(k) plan?

When compared to a SEP IRA or a Keogh plan, the independent 401(k) plan has a number of advantages. Under certain circumstances, it is permissible to take out a tax-free loan against an independent 401(k) plan. They are also simpler and less expensive for the sole proprietor to set up and maintain. These plans also provide the sole proprietor with the option of rolling the funds over into most other kinds of retirement plans if desired. Also, just as is the case with a standard 401(k) plan, pre-tax money is used to pay into the plan.

Are there any disadvantages to an Independent 401(k) plan?

There are also a few disadvantages to contributing to an independent 401(k) plan, as compared to other kinds of retirement plans. The most obvious limitation is the fact that these plans are designed strictly for a sole proprietor and their spouse or a close family member. If any employees are hired, then they are no longer eligible to participate in an independent 401(k) plan. If a person owning a sole proprietorship has any plans to hire employees, an independent 401(k) plan would not be the best plan. These plans are also relatively new, which means there may still be fewer investment options from which to choose.

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