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Thought about a Solo 401(k) plan?

If you’re a small business owner, think about setting up a “solo 401(k) plan.” This plan allows you to sock away more money than any other type of retirement plan, plus it can allow plan loans and hardship withdrawals not available with other plans. The tax rules have changed to favor these plans, so big outfits like Fidelity, Smith Barney and E-Trade now offer prototype plans and administrative costs have fallen.

With the usual defined contribution plan used by small business owners, such as a SEP or profit sharing plan, the employer’s deductible contribution is capped at the lesser of 25% of compensation or $51,000 ($56,500 for age 50 or older). In a solo 401k, you may defer up to $17,500 of compensation to your account, plus an extra catch-up $5,000 contribution if you’re over 50, the same as a traditional 401k. But here’s the kicker: Elective deferrals to a solo 401k don’t count toward the 25% cap (the cap is 20% of net self employment income if you’re a sole proprietorship). So you can combine an employer contribution with an employee deferral for greater savings. And contributions are discretionary. You can cut back on your annual contribution or skip it entirely if your business is having a tough year.


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