Self-Employed 401k

In 2001, the Tax Relief Act made it possible for small businesses to set up and contribute to a 401k plan in order to save money for their retirement in a tax deferred plan.  Small businesses having just one employee- the owner of the business, or includes the spouse of the business owner, can now open and contribute to what is called the Self-Employed 401k plan.  All retirement plans provide some form of tax breaks and are designed to help participants save for their future, but a Self-Employed 401k plan also offers a wide range of additional benefits.

Sometimes a self-employed 401k plan is referred to as a 'Solo 401K" or an "Individual 401k". 

Self-Employed 401k Eligibility Requirements

They're designed for small business owners and sole proprietors with only a single employee (or the owner and his or her spouse).  It is a fairly new retirement investment product, and so there are only a few vendors offering the Self-Employed 401k retirement plan.

Independent conractors that earn income, including freelancers, partnerships, sole proprietors, "S" corporations or Limited Liability Companies (LLC) are eligible.

Self-Employed 401k Benefits

As the 401k contributor and business owner, you are afforded complete flexibility in the contributions made to your 401k plan.  On an annual basis you can decide whether or not you want to contribute to your 401k plan and if so, how much.

Some retirement plans designed for small business owners impose small contribution limits.  With a self-employed 401k plan you can contribute about three times as much annually than other retirement plans allow you.

A large 401k plan sponsored by the employer of a fairly large organization requires extensive set up and complicated administration requirements.  A self-employed 401k plan is easy to set up and fairly inexpensive to maintain.

One of the favorite features of a self-employed 401k retirement plan is the ease for consolidation.  If you have other assets in a Traditional IRA or some other retirement plan, you can easily transfer them to your Self-Employed 401k retirement plan.

If you need money for any reason, you can take a 401k Loan from the money you have in your self-employed 401k. The loan limits are the lesser amount of either $50,000 or half of the balance in your 401k account.  Benefits of a 401k Loan are that the loan can be used for any purpose and the money is tax and penalty free provided you make your repayments on time.

Self-Employed 401k Contribution Limits

The total amount of salary and profit sharing that can be deposited into a self-employed 401k plan is limited to $40,000 annually, although the contribution limit is based on how a business is formed.

For non-incorporated businesses, the contribution limit is based on the net earned income.  Contributions are not charged income tax, but they are charged self-employment taxes.  The maximum contribution limit for the self-employed 401k retirement plan for a business that is not incorporated is based on salary with a maximum deferral of $12,000 and profit sharing that is limited by the current maximum contribution.

The business owner will receive a deduction of income tax for both employer contribution and salary contribution using the IRS Form 1040 when filing taxes.

For businesses that are corporated, the maximum amount of salary contribution changes annually, but is typically about 100% of your pay, up to $12,000 (more if you are over the age of 50), and the amount of profit sharing is 25% of pay (based on the income reported on a W-2).  The money is not subject to income tax bus does have to have FICA deductions.  The business will receive tax deductions for both the employer contribution amounts and the salary contribution amounts.