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Go Solo with Your 401(k)


What is an Individual 401(k)?

If you are self-employed or own a small business you could be missing out on retirement savings options.

An Individual 401(k), also known as a Solo 401(k) plan, is a retirement savings plan that all investors should consider. Usually, brokers and financial planners advise self-employed and small business owners to open IRAs. While IRAs do provide retirement planning benefits, the amount of money you can contribute to an Individual 401(k) is significantly higher than that of an IRA.

The Individual 401(k) is nothing new. Back when Jimmy Carter was president in 1978, Congress added section 401(k) to the Internal Revenue Code. The section stipulated that employees not be taxed on income received as deferred rather than direct compensation. Thus, the Individual 401(k) is simply a 401(k) plan for one rather than numerous people, with the same rules and regulations. Keep in mind that the 2002 EGTRRA tax law changed how income deferral contributions are calculated, so maximum deduction limits have increased significantly for many people.

What Are the Types of Individual 401(k)?

Brokers and other financial institutions generally limit Individual 401(k) investment options to stocks and mutual funds and exclude features such as loan and Roth contributions. Many firms avoid options to help customers diversify their portfolios to include non-traditional investment options such as, real estate, precious metals and other commodities. However, iPlanGroup sponsors non-traditional investments in addition to the more traditional purchases.

Advantages of Going Solo

  1. Loan Feature: You can borrow whichever is less, $50,000 or 50% of your account value, for any purpose, as long as the loan is paid back over five years at least quarterly at a minimum prime interest rate
  2. Reasonable Overhead Costs: There are no annual filing requirements unless you have over $250,000 in assets in your Individual 401(k). If you do exceed $250,000, you will need to file Form 5500-EZ with the IRS
  3. Contribution Limits: Individual 401(k) participants can contribute up to $53,000 annually and $6,000 in catch-up contributions if you are over age 50 (2015 limits)
  4. Roth Contribution Options: An Individual 401(k) plan contains a Roth sub-account so you can contribute without income restrictions
  5. Your Individual 401(k) can also borrow funds in the form of a non-recourse loan and not be subject to Unrelated Debt Financed Income (UDFI) taxes of approximately 35%.