New Retirement Plan Available for Solo Practitioners

From OSI Business Services:

If your business is essentially a one-person operation, there's a relatively new option to help you save more money for retirement: The Solo 401(k) plan.

Ordinarily, traditional defined contribution retirement plans allow annual contributions of either 25 percent of salary if you're employed by your own S or C corporation or 20 percent

of self-employment income if you operate as a sole proprietor or single member LLC. But traditional profit sharing plans, Keoghs or SEP plans are subject to a $45,000 cap for 2007 (up from $44,000 in 2006).

Not bad, but with a Solo 401(k) plan, you can probably make substantially larger contributions that lower your tax bill and generate more tax-deferred earnings for retirement.

A Solo 401(k) is made up of two separate parts. Together, the two parts make the plan advantageous:

1. Elective deferral contribution - In 2007, as much as 100 percent of the first $15,500 of your salary or self-employment income can be put into an account (up from $15,000 in 2006). That amount increases to $20,000 if you are 50-years-old or older at year end. 

2. Additional employer contribution - Your employer (your company or you personally) can contribute an additional 25 percent of your salary or 20 percent of your self-employment income.

The sum of the two parts is capped at 100 percent of your annual employee compensation or self-employment income, or $45,000 in 2007 ($44,000 in 2006) whichever is smaller. (However, the cap is higher for people age 50 or older). A Solo 401(k) doesn't force you to contribute more than you can comfortably afford:

Contribution Cap Here is the annual dollar limit on combined elective deferral and employer contributions:   For 2007, the cap is $45,000 or $50,000 if you are age 50 or older (up from $44,000 and $49,000 for 2006, respectively).

The plan lets you rack up major tax savings in good years, by making maximum contributions, but gives you the option of contributing less - or even nothing - in lean years when you need to conserve cash.

Plus, you generally get the benefits of traditional 401(k) plans, such as the ability to borrow from your account.

Establishing and operating any 401(k) plan means some up-front paperwork and ongoing administrative effort. With a solo 401(k), however, the administrative work is simplified since you are the only participant.

There are a couple of caveats:

If you earn a very high income and are younger than 50, the Solo 401(k) may not permit larger contributions than a traditional plan because of the annual $45,000 cap in 2007 ($44,000 in 2006). In general, you should only set one up if it allows significantly larger contributions because a Solo 401(k) costs more to operate.

If you have employees (other than your spouse), you may also have to contribute to their accounts. In this case, you have a regular 401(k) plan that is subject to a bunch of complex rules.

Ask your tax adviser to sort out the complexities of various retirement plans and determine whether a solo 401(k) is right for you.