You may not have heard about Individual 401(k) funds before. But if you are self employed, read on As you know, almost every employer offers a retirement option to his or her employees — called a 401(k) plan. People who are self employed can open an IRA (Individual Retirement Account) as a way to save for retirement. But even better than a regular IRA is an Individual 401(k) or “solo k” account.
There are several reasons why a solo k beats an IRA. First and foremost is options. As the holder of a solo k, you can choose to fund your retirement account with pre-tax or post-tax dollars. In other words, you can decide whether your fund works like a traditional IRA or like a Roth IRA. This is exciting news. It’s not an easy choice, deciding between regular or Roth for your account. Many factors need to be considered and you may want to get professional help in making that decision.
The other huge reason to open a solo k is that you can contribute a lot more money to it, in comparison to a regular IRA. Think of it this way – it’s like you are saving for retirement like an employee and like a business owner all at the same time. So you can contribute about 25% more to this sort of account than you otherwise could. The current maximum for contributions is over $45,000 each year. $45,000
In general a solo k is going to function just like a regular 401(k) account. You can borrow against it, if you suddenly found yourself strapped for cash. You should double check the reasons allowed for a loan against the solo k. Depending on who is managing your fund, the reasons allowed might vary. In general they are as you’d expect – buying a first home, medical bills and job loss. That goes for the fine print, as well. A loan against your solo k has to be repaid with interest. So think carefully before making that decision. Also, like a 401(k) account, you can choose to close out the solo k. You’ll incur the usual penalties in making that choice. A 10% early withdrawal penalty will be assessed. In addition, you will owe taxes on the money you pull out. As a good rule of thumb, if you choose to take some money (as in not a loan) or close the account completely, you’ll get about 60% of the money. The government will take the rest.
Being your own boss is exciting and rewarding. I like having my own business and being a stay at home mom. Anyone who is considering working for themselves should think about the good and bad of being self-employed. I like that saving for retirement is easier than ever before, no matter if you work in an office or from home.