| Self-employed?
Consider a solo 401(k) | | |
| Accessible
pre-retirement cash
Solo 401(k)s have another big advantage over other
self-employed retirement accounts. Just like similar retirement plans offered
by large employers, solo 401(k) allow for loans.
You can borrow up to 50 percent (or a maximum dollar
limit of $50,000) of the account's money -- if the investment management company
handling your account allows this option. Not all do. Where
loans are allowed, they must be paid back within five years with interest. But
the long-term
adjusted applicable federal rate applies, which today is a low 4.65 percent.
Plus, that interest goes right back into your account. Pioneer's
McLaughlin says if you lose your job and need some cash, such a loan can be a
way to get money from a corporate 401(k) without facing the penalties and taxes
associated with retirement plan distributions made before you reach age 59½.
While you must have some self-employment income to establish the account, there
is no on-going income requirement. It's enough to pick up some consulting fees
while you're unemployed, get the solo 401(k) going, combine money from other accounts
and then borrow against it. A husband and wife, each with
a solo 401(k), can borrow a combined $100,000 and Eva Rosenberg, an enrolled agent
and publisher of TaxMama.com, recommends the move as a great way to finance a
business start-up, send a kid to college or even buy a house. If
the worst happens and you can't pay off the loan, the IRS will consider it a distribution
and you'll owe taxes and penalties -- unless, of course, you cross the age 59½
threshold before the loan comes due. Jim Kennedy, California-based owner of Bagged
Wine, which sells wine-tasting kits, says he used this method to help start his
business. "I'm only 39, so I'm not concerned about retiring,"
says Kennedy. "But I thought it was better deal than going into the home
equity." Don't miss the deadlines
To take advantage of a solo 401(k) for self-employment money you earned this year,
you'll have to set it up by Dec. 31. But don't wait too long into December to
open the account. While the application is manageable without an accountant's
help, it can't be done in five minutes. And if you're interested
in alternative investments such as real estate, give yourself time to track down
a management firm because most of the big ones don't offer this option. When
shopping for a management company, be sure to ask about management costs. As with
any investment, retirement or regular, administrative costs can eat into your
earnings. Also, if your company is growing, a solo 401(k)
may not be a wise choice. Once you hire employees, you'll have to convert your
individual plan to one that covers everyone, meaning you'll have additional tax
and administrative concerns. Finally, keep in mind that these
plans put aside retirement money in a tax-deferred, not tax-free, account. When
you retire and start taking out money, you'll have to pay taxes on it. At that
point, however, you'll likely be in a lower tax bracket. Jennie
L. Phipps is a contributing editor based in Michigan. | 
