Individual 401(k) accounts may allow you to save more for retirement
August 05, 2011
More than a few of us in recent years have started our own small businesses or cultivated part-time consulting work in reaction to the bad economy. It's a way to make up for reduced salaries, rebuild our savings accounts or simply to get a little more money into a checking account.
If you are among the self-employed and you are interested in setting aside some of your earnings for retirement, one of the best savings accounts available might be an individual 401(k) plan, also known as a solo 401(k).
A solo 401(k) is just like traditional 401(k) savings accounts except that it covers just one person, such as a sole proprietor, a consultant or an independent contractor. Your business can't have any full-time employees, and you have to be able to show that you actually are making money self-employed. Your self-employment can be in addition to a regular, full-time job.
Solo 401(k) savings accounts have been around since 1980, when the original 401(k) plans were created by Congress, but according to Forbes.com, they have been one of the best savings accounts since a 2002 tax law changed the way salary deferral contributions are handled, increasing the amounts people could put toward their retirement.
Now solo 401(k)s allow self-employed people to put away more pre-tax dollars than the common alternative--individual retirement accounts (IRAs).
According to thestreet.com, a solo 401(k) allows an over-age-50 catch-up clause that increases the maximum contribution annually from $49,000 for IRAs to $54,500 for solo 401(k)s. Solo 401(k)s also allow Roth contributions and loans. Unfortunately, some financial institutions who administer the solo 401(k)s limit the type of investments you can make to stocks and mutual funds and exclude loans and Roth contributions.
Other companies, however, allow what's called "checkbook control" solo 401(k)s that allow you to serve as the trustee of the plan and make non-traditional investments in such things as gold, real estate and private business stock. You can also borrow up to 50 percent of your account value or up to $50,000, whichever is less, and move it into your checking account--provided you pay the money back with interest in at least five years.
In some instances, the savings offered by solo 401(k)s over IRAs are even greater. According to the Wall Street Journal, a 51-year-old sole proprietor making $100,000 a year would only be able to put $18,600 into an IRA while being able to put $40,600 into a solo 401(k). If you're self-employed--even just part-time--a solo 401(k) may be worth investigating.