Solo 401 (k) lets you save big

1-person business can set aside $42,000 in 2005

Your Money

December 25, 2005|By TAMI LUHBY | TAMI LUHBY,NEWSDAY

Irwin Gordon knows saving for retirement is important. But as a sole proprietor, it's not always easy.

That's why about two years ago, Gordon opened up a Solo 401(k), which allows him to set aside more tax-deferred funds.

"I'm getting older, and I want to put some more money away," said Gordon, 68, a heating and air-conditioning contractor in Long Beach, N.Y.

The Solo 401(k) - sometimes called an Independent 401(k) or Indy 401(k) - came on the market after 2001 tax law changes.

These accounts are designed for business owners with, at most, a spouse employee, said Kristen Luby, marketing manager at T. Rowe Price, which started offering the plans last year.

They have the same contribution limits as the employer-based 401(k) - $14,000 per person this year and $15,000 in 2006. Those 50 and older can set aside an additional $4,000 this year and $5,000 next year in "catch-up" contributions. The funds are put in before tax, which doesn't have to be paid until the money is withdrawn in retirement.

But business owners also can put in an employer contribution of up to 25 percent of their compensation, for a combined total of $42,000 in 2005 and $44,000 next year. (The limits for those 50 and older are $46,000 and $49,000, respectively.)

These contributions are considered a business expense, so they are tax-deductible, which can save some proprietors up to $5,000 in taxes.

"This gives the sole proprietor a similar retirement plan to if he or she worked for a company, because you get both the employer contribution and salary deferrals," Luby said.

About $4 billion had flowed into roughly 85,000 Solo 401(k) accounts as of September, according to Sam Campbell, analyst with the Financial Research Corp., a Boston consulting firm.

There's still time to set up a Solo 401(k) this year. Business owners have until Dec. 31 to create the plan, but don't have to fund it until they file a tax return.

Although sole proprietors have long had access to retirement plans such as simplified employee pensions and Keogh retirement plans, the Solo 401(k) can be easier and cheaper to set up and administer, experts said. Owners also can borrow against their Solo 401(k) accounts, a useful feature for many in business for themselves.

One drawback, however, is that sole proprietors cannot continue financing the accounts if they hire employees.

Tami Luhby writes for Newsday.

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