Do you run your small business as a one-person operation? You might consider setting up a solo 401(k) plan. This type of qualified retirement plan provides an edge over comparable plans.

With the usual type of defined contribution plan chosen by small business owners — such as a Simplified Employee Pension (SEP) — the employer’s deductible contribution for 2010 is capped at the lesser of 25% of compensation or $49,000 ($54,500 if you’re age 50 or over). Note: The maximum compensation that may be taken into account for these purposes is $245,000 for 2010. (These figures are adjusted annually for inflation.) But that’s as far as it goes.

In contrast, if you’re an employee participating in a traditional 401(k) plan, you can make an elective deferral to the plan within annual limits and the employer may match part of your contribution. Usually, it will add an amount equal to a single-digit percentage of your compensation.

Now see what happens when you “go solo.” For 2010, you can defer up to $16,500 of compensation to your 401(k) account, plus you can make an extra catch-up contribution of $5,500 if you’re age 50 or older — the same as with elective deferrals to a traditional 401(k).

Of course, the limits on deductible employer contributions still apply, but here’s the kicker: Thanks to a recent tax-law change, elective deferrals to a solo 401(k) don’t count toward the 25% cap. So you can combine an employer contribution with an employee deferral for even greater savings.

If your business isn’t incorporated, the 25%-of-compensation cap on employer contributions is reduced to 20% because of the way contributions are calculated for self-employed individuals. But that still leaves you plenty of room to maneuver.  And remember that you can boost your contributions once you reach age 50.

We can help you determine if a solo 401(k) plan meets your needs. You may be able to save thousands more for retirement with a solo 401(k) plan, so don’t hesitate to call our office with any questions or concerns.


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