A solo 401k plan, or self employed 401k as it is sometimes called, is designed for independent contractors and the owners of small businesses to hold and develop retirement savings. It is often thought of as the most desirable retirement investment option as the annual contribution limits are set high and are also tax free. The capital which is deposited can grow tax free until the time the funds are withdrawn upon retirement.
If this is an option that is of interest to you, your first step should be to make certain your meet the eligibility requirements that are set out. In general terms, if you are self employed in some form you should be approved for a solo 401k.
Once you believe you do match the qualifications that are given, you will then need to identify a reputable provider. There are in fact various investment firms you can open a 401k plan with, research the differences and be clear on how your deposits will be invested. You may have a preference on whether the capital is being used to buy stocks, mutual funds, mortgage loans, investment loans, or life annuities.
It is vital that you familiarize yourself with the latest rules that govern the 401k solo account yearly contributions. As of 2013, you can contribute as much as one hundred per cent of the first $17,500 you earn in a self employed role, and a smaller percentage thereafter. The upper limit would be $51,000 for 2013 and $52,000 for 2014.
You will need to receive the necessary documents and forms from a 401k provider. Also there would be a requirement for you to submit material that proves that you are self employed and that the income that is deposited year on year comes through no other source.
Many owners of small businesses do not have the time to analyze and research the various benefits and constraints relating to taking out a solo 401k plan. For this reason you may find it preferable to hire an investment advisor who can explain the various nuances and details of the different options.
Before you decide on a retirement plan it is essential that you are clear on the capital you would like to have access to upon reaching the age of sixty five, and the type of lifestyle you would desire. By having a clearly defined set of targets you should find it easier to make a decision governing a 401k plan.
If you currently hold other retirement plans, you may find it beneficial to roll these over into a solo 401k. Be aware of any restrictions or penalties that may be levied when switching from one investment account to another, a withdrawal may leave you at a loss financially.
Once you have found a suitable plan you should then try and contribute the maximum amount each year. The tax deductible nature of a solo 401k is one of the most desirable features that is available. Remember to make contributions prior to December 31 each year to be provided the greatest tax benefits.
By Michael Brown
Retirement planning expert and rollover IRA to gold adviser.