What is a Self-Employed 401(k) Plan?
As more people choose to make a living as a freelance professional, alternatives to employer sponsored retirement and investment plans have developed. Since 2001, it has been possible for this growing sector of the work force to create a self-employed 401(k) plan. Serving as a means of building a nest egg for the future, the solo 410(k) plan provides all the advantages of group plans, plus a few other incentives. Self-employed 401(k) plans are characterized by the allowance of higher contribution limits than is found with many employer sponsored retirement plans. This feature of the self-employed 401(k) plan allows the freelance professional to divert extra funds directly into the plan, growing the retirement fund quickly in times of prosperity. At the same time, the self-employed 410(k) plan allows the individual to determine how much or how little to contribute in a given calendar year. This can be important for persons who work as independent contractors, since generated revenue fro
A self-employed 401(k) plan is a 401(k) that is set up by owner-only (plus spouse) small businesses. Any type of business can open up these plans, provided the only employee is the owner (plus his spouse). Corporations, S-corporations, sole proprietorships, partnerships, and LLCs taxed as any of the above are eligible. 2. How much can I contribute? There are several limits involved here. The first thing to understand is that the general elective deferral limit ($15,500 in 2007 and 2008) applies for all salary deferral arrangements (plus $5000 catch-up if over age 50). If you have another 401(k) plan, the deferral limit must be coordinated between the two. Because the self-employed person is both the employer and the employee, he can also make an employer contribution. This limit is 25% of compensation (salary). In the case of self-employed people (who don’t have salaries), the limit is 20% of net income from self-employment. Finally, there is an overall limit for both of those parts. T
