Even self-employed folks can contribute to a 401(k) retirement plan in 2014. Who cares if you don't have a huge corporate behind you, with a individual 401(k) or a solo 401(k) you can save for your own retirement and get all the the same tax and investing benefits that you would with a regular 401(k) plan.
2014 Solo 401(k) Contribution Limits
The contribution limits for solo 401(k) plans rise each year or two to adjust with inflation. Just as with traditional 401(k) plans, the limits rose in 2013 but stay the same for 2014. You may put up to $17,500 in your individual 401(k) plan in 2014. If you are over 50, you can add $5,500 to that limit, for a maximum 2014 contribution of $23,000. The additional $5,500 is called a catch-up contribution, and it's there to help people nearer to retirement accumulate more savings. Typically, you would have to check to confirm that your plan offers such contributions, but if you have an individual 401(k), the choice is up to you.
Your 2014 solo 401(k) plan limits could go even higher, if you decide to give yourself an employer match. If you have ever worked at a big company, you may have had the option of a match of a certain percentage of your 401(k) contributions. With a solo 401(k), you can give yourself a match, effectively doubling your potential contributions each year. You are able to match between 20% and 25% of your salary, up to a limit of $52,000 in 2014.
Solo 401(k) Basics
A solo or individual 401(k) works exactly like a regular 401(k), except the you open it for yourself in your solo business. The money you contribute to the account can be deducted, taken right off the top of your income when you file taxes. Your money grows (when it grows, that is—remember it's invested so it will likely move up, down and sideways with the market) tax-deferred in the 401(k) until the time you retire, after age 59 1/2 at least. Of course, you pay taxes whenever you take out the money. But if you withdraw it before age 59, you will most likely also face a 10% penalty.
Another option is to the Roth solo 401(k) or Roth individual 401(k). If you are familiar with a Roth 401(k), it works like that. Meaning, you don't get any upfront tax deduction on the money you put in a Roth 401(k). It goes in on a so-called after tax basis. But when you withdraw your money from a Roth 401(k) at retirement, you will generally not pay taxes on it. (Generally because the rules are complicated, but that's what it is designed to do.) In 2014, you can put up to $17,500 into a Roth solo 401(k), plus a catch up contribution of $5,500. There is no employer match allowed in a Roth solo 401(k).
How Solo 401(k)s Stack Up
If you are the type of generous self-employer who matches your self-employee contributions, you can really rack up some tax-free savings with an individual 401(k). Loans are also allowed with solo 401(k) plans. You have to pay yourself back with interest, but it's a nice option if you need access to the funds. And having that option may encourage you to stuff more money into your solo 401(k), which is a good move in the long run.
The tradeoff of a solo 401(k) is it may be pricier than a SEP IRA, a SIMPLE IRA or any other type of self-employed retirement plan. There's paperwork and administrative time spent that makes these plans a little complicated.
Also, you must make your solo 401(k) contribution before December 31 of the contribution year. With a self-employed IRA, you can decide to make a prior year contribution at tax time. That's not the case with a solo 401(k), or any other type of 401(k) for that matter. If you are looking for a retirement plan for your one-person business, compare self-employed retirement plans before you decide.
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