An individual 401K is referred to as a solo 401K, specifically designed in 2002 for the self-employed individual. In today’s economy, many have gone into a self-employment mode to make ends meet or have come across an opportunity for a career and lifestyle transition. The solo plan works similar to a self directed IRA, allowing for retirement planning and tax saving contributions with some additional business deductions for the owner.
Compared to other retirement plans, solo plans offer the same tax-free benefits of self directed IRA real estate under an IRA LLC. If you are self-employed or own your business, then this is an option worth looking into because you do not need to be incorporated to take advantage of the savings.
The solo plan allows the self-employed individual or business owner to develop a suitable plan with tax saving advantages, like a self directed Roth IRA. It also offers tax deductions for the business, allowing the owner to receive a double deduction savings at the same income levels while building a retirement account.
As of 2011, individuals who are at the age of 50 or older can contribute $54,500 annually. There are requirements; contributors must be on the payroll with a W-2, all full-time employees are eligible and part-time employees working more than 1000 hour per year will also qualify.
If your spouse is working in the business, they need to be an employee on the payroll. As an employer you are allowed to make a contribution in addition to making a personal contribution for additional tax savings. There are limits to employer contributions, like the traditional plan used by most individuals. It is strongly recommended that you meet with a financial planner to ensure that your plan meets all financial requirements.
Deadlines for establishing a solo 401K is 31 December of each year to receive the tax deduction during the previous fiscal year. Self-employed individuals or business owners are not required to file the IRS form 5500 until the plan is in excess of $250,000.
Most self-directed IRA plans have these benefits. The solo 401K allows the contributor to borrow up to 50% or $50,000 from the account. Terms and conditions are that the loan must be repaid, regular payment must be made and a reasonable interest charge must be applied, similar to self directed IRA.