Self Employed 401k Specifics

Self Employed 401k plans provide unique benefits to those self employed or small business owners that qualify.

Self Employed 401k Benefits

• High Contribution Limits - In 2009 and 2010 contributions of up to a maximum of $49,000 or up to $54,500 if age 50+ can be made into a Self Employed 401k. In 2009 and in the years that follow there are COLA (Cost of Living Adjustments) to the contribution limits. Compared to other self employed retirement plans such as a SEP IRA or Keogh a Self Employed 401k may allow a greater contribution at identical income levels, therefore maximizing contributions and valuable tax deductions. This is one of the most significant advantages of the Self Employed 401k.
   
• Tax Deductible Contributions  - In general contributions are 100% tax deductible.
   
• Tax Deferred Growth  -  Contributions and investment earnings grow tax deferred. After age 59 1/2 withdrawals can be withdrawn without penalty. Federal and state taxes if applicable will apply.
   
• Loans - Ability to receive a Self Employed 401k loan up to a maximum of $50,000. Provided a Self Employed 401k has a loan provision, you can take tax-free loans from your Self Employed 401k plan. Loans are not permitted with Traditional or Roth IRAs, SEP IRAs, or Keogh (Money Purchase/Profit Sharing Plans). Tax free loans (up to 50% of the total 401k value with a $50,000 maximum) are permitted. Loans must be repaid according to the terms of the loan amortization schedule which is provided when a loan is initiated. Failure to repay the loan according to these terms may result in a loan default causing taxes as well as IRS penalties.
   
• Flexible Contribution Levels - Contributions can be increased or decreased or stopped on a year by year basis.
   
• Much less expensive than a traditional 401k  - Traditional 401k plans require expensive administrating testing to make sure a 401k is in compliance with the IRS rules. "Top Heavy" and Discrimination tests do not need to be performed. This significantly reduces the administrative costs in a Self Employed 401k.

Disadvantages of a Self Employed 401k Plan

When Self Employed 401k plan assets exceed $250,000 IRS Form 5500 must be completed and submitted to the IRS annually.  

A Self Employed 401k must be converted to a traditional 401k plan if full time employees are hired. The owner's spouse employed by the business and working full time does not negatively impact the Self Employed 401k. Certain employees may also be able to be eliminated from the plan.

Self Employed 401k Frequently Asked Questions

FAQs. Find answers to your questions about the Self Employed 401k.  

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Disclosures:

*  The information on this page is for informational purposes only and does not constitute, and should not be construed as, professional, legal or tax advice. To determine your individual tax situation and specific needs, please consult a professional tax advisor.

* Information contained in these sections merely highlight some benefits. There are risks involved with all investments that could include tax penalties and risk/loss of principal.