What is an Individual 401(k)?

An Individual 401(k) plan — which can also called “Individual(k)”, “Solo 401k”, “Single(k)” and “Self Employed 401k” – is a retirement plan tailored for small businesses whose only employees are either the owner or the owner and a spouse. Due to a tax law that went into action on January 1, 2002, self employed business owners can take advantage of the benefits that a 401(k) plan offers without having to be part of a larger corporation.

Money Stack (Image: Flickr)

The Individual 401(k) differs in a variety of ways from most self employed retirement plans. The biggest difference is that business owners can make larger contributions to their Individual 401(k) plan on every income level than they could to any other retirement plan. This allows business owners to get the most out of retirement contributions and tax deductions. Another benefit is that business owners have more flexibility in borrowing money against the value of their Individual 401(k) plans, and tax-free loans up to either 50% of the value of the Individual 401(k) or $50,000 are permitted.

In addition to these benefits, the Individual 401(k) offers tax deferred growth, contribution flexibility, cost effective administration, and retirement plan consolidation to small business owners. Individual 401(k) salary deferral contributions can also be made as Roth 401(k) contributions, which means that the business owner pays the taxes today in order to have tax-free withdrawals in retirement, which may be a better fit for some self employers. For self employed small business owners, the Individual 401(k) may be a much better fit than other similar retirement plans.