The Self-Employment 401(K)

It is a common misconception among contractors and other self-employed individuals that they do not have access to a 401(k). The individual 401(k), aka a solo 401(k), has been a legal tax deferred retirement option since 2001. The problem has been, and still is, that very few people have heard of it and only a few investment companies offer the option. Vanguard, Fidelity, and E-Trade are all offering these plans now. Here are a few details about this retirement savings option.

 Solo 401(k) Details

• You can contribute up to 100 percent of the first $17,000 your business makes.
• Although it is called a solo 401(k) your spouse can be part of the plan if they work for your company.
• If you work for another company full time and have self-employment income on the side, you can contribute to your company's 401(k) and a solo 401(k), doubling your retirement contributions. In this situation, you can only contribute 25% of your profit instead of the $17,000 limit.

What Paperwork is Required

There is, of course, some government required paperwork to establish a solo 401(k). This is minimal, well minimal for the government. It may take up to an hour for the initial round of paper shuffling. Then there are some guidelines and filings to keep in mind. You will need a Federal Employer Identification Number(EIN), which takes all of five minutes to get online at irs.gov. You do not need the EIN if you are incorporated. If you are unincorporated, you will need to use the EIN for the 401(k) paperwork and enter it, along with your Social Security number, on Schedule C of your 1040 at tax time. If you find yourself in the enviable spot of having more than a quarter mil in the 401(k), you have to file an additional form with the IRS.

TurboTax versions that support self-employment income understand solo 401(k) contributions. This should help at tax time. Unfortunately, these accounts are so unheard of that some accountants do not know what to do with them. You may want to make your accountant aware of what you are doing so that they can get up to speed before it is time to file.

The guidelines and points of interest mentioned above are only a few of the items to be considered before you open an individual 401(k). Make a call to all three of the investment firms mentioned above and ask for information. Each may offer a different set of investment options within their plan. Once you have these in hand, talk to your accountant again. It never hurts to have a second opinion on where you are going to invest.

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