The Solo 401(k) Plan – sometimes called the individual 401(k), does for the self-employed business owner what tradition 401(k) can do for a large, employee rich company, as well as SEP IRA’s designed for the self-employed plus much more.
Unlike the retirement plans most are used to, the Solo 401(k) is geared towards the sole proprietor or small business owners without additional full-time employees. That, however, does not include a spouse. The spouse of the business owner is considered owner-employee and may contribute to the Solo 401(k) plan if earning income from the sole-proprietor’s business.
The individual 401(k) gives its participants complete control over their retirement accounts. This allows for them to make all their own investment decisions without the involvement, delays and the cost associated with the custodian. Transaction fees and processing delays become a thing of the past because with a Solo 401(k) there is no need for a custodian.
This allows participants opportunities to diversify their retirement account and maximize its growth potential by utilizing their own knowledge and expertise. The qualified Solo 401k plan is also known as Ultimate 401k and also referred to as “Unlimited Investing”. The reason is, funds can be virtually invested in almost any investment opportunity, except those that are disallowed by the IRS.
The Solo 401(k) Plan allows contributions to be made in either pre-tax or after tax dollars. The traditional Solo 401(k) lets put away money on a pretax basis while it continues to grow tax-deferred. The money is only taxed when it is withdrawn at the distribution stage.
If plan participant decides to go with the optional Roth version, he or she can contribute after-tax dollars and the money can grow tax-free and will not be taxed upon withdrawal. Participant may also choose to divide the contributions between the pre-tax and after-tax.
Unlike SEP IRAs, the Solo 401(k)’s gives the account holder the opportunity to borrow against his retirement savings. Participants can borrow as much as $50,000 or 50% of their account value as long as the balance is repaid over the course of 5 years or less with regular payments made quarterly. This can be done at a reasonable rate of interest which typically whatever the prime rate is plus one percent.