I Chose the Solo (Individual) 401K for My Small Business

After a couple of years away from the corporate world, one thing I did miss was my 401K. The company I used to work for dumped the matching contribution at some point, but I still loved that plan. I could defer taxes on several thousand dollars in income each year. That’s a huge benefit it my book.

This benefit pushed me to save the maximum each year and amass a decent retirement account for a guy in his thirties. I also had a Roth IRA, which is a great compliment to anyone with a 401K, who meets the income requirements.

But when I left for the self-employed world and lost the ability to contribute to my 401K, I found that the Roth IRA alone wasn’t enough. After a year or so of struggling with the business to get it to a point to where I actually had enough to start considering retirement contributions again, I decided to open up a Solo (or Individual) 401K.

Solo 401K Rules

I’m eligible to open this type of plan because I have no full-time employees. You can open one too if you have a side income and want to contribute some of those funds to a retirement plan outside of your current 401K or Roth IRA. Just keep in mind that Solo 401K contribution limits are spread across multiple 401K plans.

Solo 401K Contribution Limits

This thing is awesome. Not only can I contribute $16,500 a year ($17,000 in 2012), but since I’m the employer, I can contribute up to 25% of the compensation I pay myself, up to $49,000 ($50,000 in 2012). The total annual contribution from both employee and employer is capped at $49,000 ($50,000 in 2012). That’s a huge deferral! Far greater than I could have ever achieved being employed.

If I choose to bring Mrs. PT on as an employee one day, then we can contribute up to the limit for her as well. Considering future “catch-up” contributions, this account could allow us to defer over $100,000 in income one day. One can dream, right?

Opening a Solo 401K

Additionally, a Solo 401K is very easy, and inexpensive to setup since I’m allowed to be the trustee of the account. I looked around and chose Vanguard as the place to open my account. As you know I like their philosophy, funds, and low expenses. The $20 annual fee on the plan is waived because I’m at Voyager level with Vanguard.

Solo 401K Contribution Deadline

I opened the account in December of 2011, and because of the genius of my accountant, was able to make the employee deferral portion before the end of the year, the deadline. Now I have until I file my business taxes to make the employer contribution.

My goals for this account going forward are the same as they were with my old 401K, contribute the maximum each year. I’m going to speak to my accountant about doing more routine paychecks in 2012 so that I can contribute on a more routine basis vs all at the end of the year.

Do you use a Solo 401K? What do you like about the plan?

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Last Edited: February 26, 2012 @ 4:24 pm
About Philip Taylor

Philip Taylor, aka "PT", is a husband and father of two. He created PT Money back in 2007 to share his thoughts on money and to meet others passionate about managing their finances. All the content on this blog is original, and created or edited by PT. Read more about Philip Taylor, and be sure to connect with him on Twitter, Facebook, or view the Philip Taylor+ Google profile.