Contact Us
Firm Overview
Why Legend Is Different
Client Types
Professional Biographies
Frequently & Rarely Asked Questions
Risk Spectrum
Investment Strategies
Second Opinion
Global Investment Pulse
Event Calendar
Press Center
Legend News
Clients Only
Career Opportunities
Newsletter Sign-up
Site Search
Site Map
Tell A Friend About This Website
Informational Booklets   
Phone: (412) 635-9210
  (888) 236-5960
Connect With Legend:
Subscribe to me on YouTube

How A Solo 401(k) Plan Provides You With An Edge

Do you run your business as a sole proprietor? For years, the options for tax-advantaged retirement plans for one-person outfits were relatively narrow, restricted to specialized small-business plans such as simplified employee pensions (SEPs). But recent legislative changes have made it possible for sole proprietorships to use the same type of retirement vehicle—the 401(k) plan—favored by bigger companies. A special “solo 401(k)” may provide a distinct advantage over comparable retirement options, enabling you to salt away considerably more money for the future.

People who work for an employer offering a 401(k) plan have the opportunity to direct part of their salary into a personal retirement account that they can invest in mutual funds or other basic vehicles. The money deferred to a 401(k) isn’t taxed, and there are no capital gains taxes on investment profits. Instead, account owners pay income tax on money they withdraw during retirement. Many corporations match a portion of employees’ contributions.

There’s an annual limit on how much can be contributed to a 401(k). For 2010, salary deferrals are capped at $16,500 ($22,000 for those age 50 or over). In addition, the total annual contribution for 2010 to a “defined contribution plan” such as a 401(k) or a SEP is generally limited to 25% of compensation or $49,000 ($54,500 for those 50 or older), whichever is less. If you’re self-employed, the cap is 20% of what you earn, and the maximum compensation for these purposes is $245,000 in 2010.

Thanks to a recent change in pension laws, however, you now may be able to combine the annual deferral to a solo 401(k) with an employer’s matching contribution so that the total going into your plan exceeds the normal percentage limit for defined contribution plans. For example, suppose you’re 45 years old, self-employed, and earn $150,000 in 2010. If you contribute to a SEP in 2010, your contribution would be limited to 20% of $150,000, or $30,000. But if you establish a solo 401(k) plan instead, you may be able to save considerably more. First, you defer the employee’s maximum $16,500 to the plan. Then, because you work for yourself, you can sweeten the deal with the maximum employer contribution of $30,000. Add the two together and you can contribute $46,500 to the plan this year.

The more you make, the more you can put into a solo 401(k), though you’ll still be subject to the overall dollar limits of $49,000 or $54,500 that apply to defined contribution plans. Once your compensation reaches $162,500—20% of which is $32,500, the maximum you can add to the $16,500 individual contribution without exceeding the $49,000 cap—the comparative advantage of having a 401(k) instead of an SEP begins to decline. But you’d have to make the full $245,000 to be able to contribute as much to an SEP as to a 401(k).

How much more can you accumulate if you choose a solo 401(k)? It depends on the maximum contributions at your income level for a 401(k) compared with an SEP and how long you have until retirement. But if, for example, you’re able to put away $15,000 more each year in a solo 401(k), you have 25 years to retirement, and you earn 8% annually on investments within the plan, you’ll pile up an additional $1,143,549.

A solo 401(k) plan may also provide other benefits, including:

·        The flexibility to put as much or as little as you choose into the plan each year. If your business is having an off year, you can reduce or suspend contributions until conditions improve.

·        The possibility of taking loans or hardship withdrawals from the plan. If you borrow from your plan, you’re effectively paying yourself back with interest.

·        The ability to accept rollovers from other qualified retirement plans or traditional IRAs.

It used to be that the administrative cost of a 401(k) plan was too high for many sole proprietors, but fees have come down during the past decade. Typically, you’ll now have to pay a set-up fee of about $100 plus ongoing expenses of a few hundred dollars a year. Keep in mind, though, that the benefits of a solo 401(k) really apply only to solo businesses. If your company employs other full-time workers, you must cover them as well and make employer contributions to their plans. But that requirement also applies to other types of retirement plans. If you run a successful one-person business and you want to build up your retirement plan balance as quickly as possible, a solo 401(k) could be your best option.

This article was written by a professional financial journalist for Legend Financial Advisors, Inc. and is not intended as legal or investment advice.

  • Commodities Stink But Serve A Purpose
  • A Guide To The New Rules On Tax Deductions In 2018
  • Will Rising Bond Yields Be Bad For Stocks?
  • A Trust For Creditor Protection
  • New Year's Resolution: Review Your Estate Plan
  • Despite Distractions, Demographics Are Poised To Drive U.S. Long-Term Growth
  • 17 Year-End Moves That Can Preserve Your Tax Benefits
  • How Now, Dow Jones Industrials?
  • ETFs Can Provide Some Other-Worldly Benefits To Investors
  • Trust As IRA Beneficiary: Not Crazy
  • Should You Fly Solo In Your Own 401(k) Plan?
  • Swap Munis To Your Tax Advantage
  • Sowing Tax Seeds For Capital Gains
  • With Fed's Mission Accomplished, Expect Rate Hikes And Low Bond Returns
  • Five Tax-Smart Ways To Transfer Your Wealth
  • Easier Rules On IRA Rollover Waivers
  • 4 Year-End Strategies For Investors
  • 6 Common Medicare Myths That Should Be Dispelled
  • 5 Key Documents In An Estate Plan
  • 10 Sensible Stock Market Strategies After A Fall
  • Be Aware Of Your Tax Surroundings
  • 4 Good Ways You Could Use An RMD
  • Take Early Withdrawals Penalty-Free
  • Life Insurance In Your Plan? Maybe
  • A New Direction For Your 401(k)?
  • Could Estate Tax Repeal Or Reform Become A Reality?
  • Taking Aim At Target Date Funds
  • Here's What You Can't Do In An IRA
  • 6 Common Estate Planning Myths: Here's The Reality
  • A Plunge, Snap Back, And A Goldilocks Economy
  • How To Avoid Emotional Portfolio Withdrawals
  • When To Harvest Gains, When To Harvest Losses
  • Are You Flying Below The Tax Radar?
  • Slice Through 7 Layers Of Taxes For Investors
  • Stay Focused On The Need For Tax-Aware Investing
  • 14 Sure-Fire Midyear Tax Planning Moves In '14
  • Beware The NII Surtax On Trusts
  • Do You Know The Basics Of 401(k) Retirement Plans?
  • 2014 Global Forecast Offers Hope Bull Market Can Spread
  • For Charitable Trusts, The Tax Icing On The Cake
  • 6 Bad Money Habits For You To Avoid
  • Want To Shift Income? Give It Away
  • Avoid Squabbling Over Your Estate
  • Wall Street Gurus Miss Again On Sector Predictions
  • Dust Off Life Insurance Policies
  • New Law Poses Tax Risks For High-Income Investors
  • How To Choose Trustees For Your Trust
  • Pros and Cons Of Section 529 Plans
  • 7 Major Tax Changes In The Fiscal Cliff Law
  • ''Ghost Story'' Can Haunt Your IRA
  • Who's Going To Pay The 3.8% Medicare Surtax?
  • New 3.8% Medicare Surtax Spurs Year-End Action
  • Selling Short And ''Short Sales Against The Box''
  • The Real Impact On US Markets Of A Greek Default
  • How Important Is The Debt Level To Future U.S. Economic Health?
  • New Study Shows Future Impact Of Great Recession
  • Commercial Real Estate May Boost Your Portfolio
  • If You Must Tap Your IRA Early, Know SEPP Rules
  • Get Up To Speed On Estate Planning
  • What Is A Will, And Do You Really Need One?
  • When Are Two Trustees Better Than One?
  • Money Market Funds Should Shrug Off U.S. Downgrade
  • What The Tax Act Means To Investors
  • Children In College Need A Health Proxy
  • The Tax Fallout From The Healthcare Reform Law
  • How A Solo 401(k) Plan Provides You With An Edge
  • Roth IRA Fall-Back: Re-Characterizing
  • Being An Informed Donor: The Realities Of Charity
  • Donor-Advised Funds Gain In Recession
  • Don't Miss Out On The Zero Capital Gains Rate
  • Finding Hidden Treasures In The New Pension Law
  • Ease Pressure On Loved Ones With Tax-Free Gifts
  • Seven Tax-Saving Moves To Make Right Now
  • Roth IRA Conversion Rule Changes Offer Opportunity
  • Nine Estate Planning Mistakes To Avoid
  • One Way To Reduce The Tax On Real Estate Gains
  • Working Longer To Fix The Retirement Mess
  • Tough Times May Turn 401(k)s Discriminatory
  • You Should Find A New Home For An Orphan 401(k)
  • Low Rates Give Estate Planning A Boost
  • Marriage Doesn't Mean Owning All Your Assets Jointly
  • Do The Math Before Refinancing Your Home
  • As Nursing Home Care Claims Drop, Home-Care Claims Rise
  • Making The Best Of A Bad Time For The Economy
  • Regulatory Guidelines Update
  • Beware Of Social Security Identity Theft
  • Free Credit Reports Available Online
  • Don't Forget About Roth 401(k)
  • Understanding the Importance of a Fiduciary Standard
  • Energy Systems Scale and Timeline
  • The Oil Patch Profit Squeeze
  • Timber As A Liquid Investment
  • Emerging Market Food Consumption Growth Equals Rising Prices
  • Timber Facts
  • Ethanol: Salvation or Panacea?
  • Emerging Market Food Consumption Growth Equals Rising Prices
  • Bank Loan Funds - A Primer
  • A Primer On Managed Futures
  • REITS: A Very Good Portfolio Diversifier, But Should You Invest In Them?
  • Does Investing Internationally Still Diversify Your Portfolio?
  • Another Way To View The Current Valuation Of REIT Sector
  • Understanding Risk-Preparing For The Unseen
  • How Volatile Can The Stock Market Be?
  • What Is Shorting Expense?
  • How Dangerous Is A Dollar Crash?
  • The Case For Industrial Metals
  • GMO 7-Year Asset Class Return Forecast Is Bleak
  • Too Many ''Phish'' In The Sea
  • Identity Theft In The New Year
  • Ways To Improve The Score
  • Know The Score
  • Total Credit Market Debt (All Sectors) As % Of U.S. GDP
  • To Reinvest Or Not To Reinvest
  • Why Not Alternative Fixed Income Investments?
  • Just How Expensive Is The Market?
  • Beware of Brokerage Firms' Misconduct
  • Identity Theft : Correct Those Credit Reporting Errors
  • Risk-Controlled Investing
  • Q & A With Robert Arnott
  • Identity Theft : Applying For Credit? Better Check Your Credit Report First
  • Identity Theft: Everyday Prevention
  • Identity Theft: Help Is On Its Way
  • Identity Theft: Tips to Protect Yourself
  • Identity Theft: What Documents Should You Shred Or Store?
  • Identity Theft : Don't Fall For That E-Mail!
  • Identity Theft : One More Reason To Protect Your Credit
  • Identity Theft: A Note About Social Security Numbers
  • What Do Rising Interest Rates Mean For Money Market Yields?
  • Section 529 Plans Are Popular But Not The Only Way To Go
  • The Importance Of Commodities In A Portfolio
  • A Tale Of Two Hedges
  • Bank Loan Funds: A Great Fixed Income Investment As Interest Rates Rise
  • REITs: A Great Diversification Investment
  • What Is Risk?
  • How To Find A Great Financial Advisor?
  • Is It Time To Find A New Financial Advisor?
  • Year-End Tax Planning Can Help Generate High Return On Investment
  • 4 Steps To A More Secure Investment Portfolio For Your Retirement
  • Medical Practice Succession Planning: Developing A Plan
  • Traditional Investing May Decrease Your Retirement Lifestyle
  • Understanding Deflation
  • Medical Practices Receive Temporary Depreciation Bonus
  • Is Your 401(k) Plan A Failure?
  • Tax Issues To Consider When Buying A Long-Term-Care Policy
  • The ERISA Retirement Plan Law Spells Out Fiduciary Issues
  • Evaluating The Quality Of A Company's Earnings
  • Investing In Times Of Uncertainty And Risk: The Importance Of Diversification
  • Yesterday's Great Companies
  • 2001 Tax Relief Act Changes Education Planning
  • A Retirement Plan Primer After The 2001 Tax Act
  • Beware Of Common Home Repair Scams
  • Custodial Accounts: One Way To Make Gifts To Children
  • Estate Taxes To Be Reduced Then Repealed In 2010
  • Faulty IRA Conversions Can Lead To Tax Penalties
  • Many Individuals Pay Private Mortgage Insurance Beyond When It Is Necessary
  • Rethinking Estate Planning
  • Retirement Plan Contribution Limit Changes
  • Shopping For A Bank Account That Pays The Highest Possible Rate Of Interest
  • Your Medical File Report May Need A Check-Up
  • Do It Yourself Tax Preparers Watch Out: Tax Answers From IRS Centers Oftentimes Are Incorrect And/Or Insufficient
  • Five Tips For Preventing Thefts From Your Checking Account
  • Home Office Deductions: Hoops To Jump Through
  • Income Tax Effect On Single And Married Taxpayers
  • Income Tax Planning For Investments
  • Property Tax Challenges Should Not Be Overlooked
  • The IRS Will Follow Your Wealth To The Ends Of The Earth
  • When Do You Need Life Insurance
  • Year-End Tax Defferal Planning

  • ©2018 Legend Financial Advisors, Inc.®. All rights reserved.