The Value of a Self-Employed 401k to a Small Business

If your small business consists only of yourself and your spouse, opening a self-employed 401k retirement plan (sometimes referred to as a solo 401k or an individual 401k) can, in some cases, be a wise choice. Here are eight reasons to consider a self-employed 401k retirement plan.

More Savings. You may be able to save more at the same income level with a self-employed 401k retirement plan than with other options such as a SEP IRA or a SIMPLE IRA.

Bigger Tax Deductions. Contributions to a self-employed 401k are tax deductible for you and/or your business. As a result, since you may be able to contribute more to a 401k (at the same income level) than with other small business retirement plan options, you may also be able to save more on taxes.

Allowed for Most Business Structures. Whether your business is a sole proprietor, a partnership, a C Corporation, an S Corporation, or a Limited Liability Corporation, it qualifies for a self-employed 401k.

Tax-free loans may be possible. If your company's self-employed 401k plan allows loans, you may be able to borrow up to $50,000 from your account. You will have to repay yourself, with interest, but, in some cases, this can be an affordable way to access funds.

Flexibility in Contribution Levels. There are no mandatory contributions with a self-employed 401k. You can decide each year, depending on your and your business's financial situations, whether to contribute at all and, if so, how much.

Low Administrative Costs. Before the advent of self-employed 401ks, many small businesses avoided starting 401k retirement plans because of high administrative costs related to staying in compliance with Internal Revenue Service (IRS) regulations. However, today's self-employed 401ks are relatively inexpensive, especially if you do some comparison shopping among brokerage firms that are competing for this business. Also, there are no regulatory filings required until the plan assets reach $250,000. At that level or above, you will have to file Form 5500 annually with the IRS.

Rollovers Allowed. You can rollover assets from other retirement plans to a self-employed 401k. This includes assets in traditional IRAs, SEPs, traditional 401k plans, money purchase plans, profit-sharing plans, Keoghs, defined benefit plans, 401(b) plans, and rollover plans. Combining retirement assets could be more cost effective and easier to manage. Also, as already discussed, you may be able to borrow from your self-employed 401k, whereas this option is not available with some other retirement plans.

Plenty of Investment Options. With a traditional 401k, employees often are offered a limited menu of investment options for their retirement funds. With a self-employed 401k, the investment choices are up to you and, therefore, may be far more extensive.

Sources:

http://www.selfemployed401kcenter.com/ , Self Employed 401K/Self Employed 401k Center

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