A 401(k) is a company-sponsored retirement plan that allows employees to surrender a portion of their salaries to be invested in a tax-efficient manner. All funds paid into a 401(k) plan are retained on a tax-free basis until the holder reaches age 65 and withdraws money from the plan. Employees can contribute up to $16,500 into such a plan annually (as of 2011). Employers can make contributions for employees, too.
Federal legislation passed in 2001 enables self-employed people to contribute to a different form of 401(k) plan. The self-employed 401(k)-also called a solo 401(k) or individual 401(k)-allows business owners to pay into a tax-efficient plan. By combining salary and profit sharing (as both the employee and the employer) self-employed workers can make significantly higher contributions to their 401(k) plan than their employed peers can. As of 2011, the combined annual limit is $49,000 (or $54,500, if the individual is age 50 or older). Other benefits and conditions of the plan remain the same: Savings are retained interest-free, subject to a 10 percent penalty on withdrawals before age 65.
Benefits to the self-employed
Solo 401(k) plans offer a number of advantages to self-employed people. Aside from the higher contribution limits, plan-holders can borrow tax-free loans against the plan, up to a maximum of $50,000. The combination of salary and profit-sharing contributions is more tax-efficient for the business overall (an annual savings of about $8,000 on net profits of $100,000). The solo 401(k) is a much less expensive plan to administer compared to the employer plan. Requirements for complicated tests to prevent discrimination are not required, and IRS paperwork doesn't need to be filed until the plan accumulates $250,000.
Notably, business owners who retain a regular, employed role can pay into both a 401(k) plan and a different self-employed plan.
Tax adviser can help you choose
If you want to start a self-employed 401(k), it's wise to look into the various options on the market. Although plans are offered by a number of different providers, legislation largely dictates the benefits and terms-so you don't need to compare and contrast based on these terms.
Self-employed 401(k) plans are not, however, the only option open to business owners. A SEP IRA, Simple IRA or profit-sharing plan are other choices, any of which could be the most tax-efficient option, depending on your type of business, net income and age. Your tax adviser can help you get the best retirement plan, including the various 401(k)s.
There is a lot of important 401(k) information you need to consider. Fees are a part of most financial transactions and a 401(k) is no different. There are common fees associated with a 401(k) plan that you should be aware of so you can make the best decisions when it comes to investing and withdrawing money. |
Before you convince yourself that borrowing is the best way to address your current financial priorities, make sure you understand the 401(k) rules and the risks that may apply to you. |
A 401(k) plan has many advantages, but is it right for you? Read on to learn more about this retirement savings option. |
The decision whether to choose to take out your 401(k) distributions as a lump sum payment or not is dependent on many things, specifically your current financial state, other investments and retirement contributions and your plans for retirement. |
If you're not sure whether to invest in 401(k) plans or Roth IRAs, consider differences between the two to help you make your decision. |
What are the advantages of a 401K plan? Investing in a 401K plan at work is a wise decision, especially if your employer matches your contributions. |
For those people who have contributed to a company 401(k) account for years, it's common knowledge that early retirement withdrawals from the 401(k) account results in penalties. What about those who want an early retirement? |
Before you decide to withdraw money from your 401(k) retirement plan, there are few 401(k) withdrawal guidelines you should be aware of. |
Some self-employed 401(k) planning administrators are circulating misinformation about 401(k) rules, so if you're considering a solo 401(k) or self-employed 401(k) plan, make sure you do your research first. |
401k rollover options are a lot simpler than you might think. Read on to find out what you can do with your 401(k) plans after leaving a job. |
Learn all about 401k plans with our comprehensive guide including everything from 401k plan facts you should know to 401k rules for borrowers to 401k advice for taking 401k distributions to 401k rollover options and more. |
If you've got a financial emergency, a 401(k) hardship withdrawal may be your only choice to resolve it. If you need to make a 401(k) hardship withdrawal, check your 401(k) rules for the specifics of your plan. |
After carefully planning what money goes into the account and how it's handled, knowing some helpful 401(k) advice, like the requirements, rules and regulationsand how they govern how you withdraw those funds will help you make the best choices for 401(k) distributions. |
How much can I contribute to my 401K plan? is a common question for employees. Both employers and the IRS set limits. |
Participating in 401(k) plans is one of the best strategies for achieving a lifetime of financial security. Understanding 401(k) plan facts will help you to evaluate the quality of the plan and know the rules that apply to contributions and balance transfers. |
