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The beauty of the solo 401(k) is that you don’t have to earn as much as with other plans to qualify for the maximum contribution. If your business is incorporated, for example, you need only make $116,000 of gross income to contribute the full $44,000 this year. Unincorporated business owners need to earn $153,000 to max out. With a SEP IRA or Keogh, however, you would need to earn at least $176,000 with an incorporated business and $229,000 with an unincorporated business to save the full $44,000 each year. You can estimate your own contribution limits using the calculator at www.pensiononline.com/ 401khelpcenter/netcalc.asp.
Annual fees to administer a solo 401(k) typically run in the $100 to $500 range, depending on the services provided. For example, Decimal charges an annual $149 administration fee plus $175 to file and prepare IRS Form 5500 once your plan assets top $100,000. Plus, you are responsible for paying regular fund expenses and investment fees.
With its stellar savings power, the solo 401(k) adds up to one of the most attractive options for individual business owners. But there’s even more to love about the plan:
Tax efficiency. Contributions to a solo 401(k) reduce your taxable income dollar for dollar. That means if you’re in the 25% tax bracket, for example, every $1,000 you contribute costs you just $750 after you factor in the tax savings.
Flexibility. You’re not locked into a fixed contribution schedule. As long as you stay within the limits, you can contribute as much—or as little—as you want in any given year. So you might max out your contributions one year but scale back in a lean year without penalty. You also get flexibility in your investment choices. A typical employer-based 401(k) gives you a handful of mutual funds to choose from. But depending on your solo-plan provider, you may be able to choose from dozens or even hundreds of investments.
Accessibility. Many self-employed workers put off saving for retirement because they think they might need the money later to put back in the business, says Mark Larsen, a self-employed business consultant in Algonquin, Ill. The ability to borrow from his solo 401(k) was what drew Larsen to the plan. “When you have a downswing, you can pull the money out for operating capital,” he explains. IRS rules allow you to borrow up to $50,000 from your 401(k), but not all plan administrators offer this feature, so be sure to check. You typically have to pay back the money, with interest, within five years. If you don’t, it counts as a withdrawal, and if you’re under age 55 (if you close the business) or age 59 1⁄2 (if you don’t), you’ll owe income tax at your regular rate on the entire amount, plus a 10% early-withdrawal penalty.
Easy to roll over. When you leave your job to go into business for yourself, you don’t need to leave your 401(k) behind. It easily rolls over into a solo plan—and there’s no dollar limit on the rollover. If you later decide to go to work for someone else, it’s simple to roll the money back over to a company plan, says Jacqueline Besse, Decimal’s executive director for client and partner relations.
Ability to catch up. If you’re age 50 or older, you can make “catch-up” contributions, adding up to $5,000 more to the $15,000 employee portion, boosting the total solo 401(k) contribution to $49,000 this year. SEP IRAs do not allow catch-ups.
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