Solo 401(k)s are a great retirement planning tool for people who have self-employment income. You can save a tax-deferred $16,500 in 2011, or $22,000 if you're at least 50 years old -- or you can make it a Roth plan. Plus, as your own employer, in 2011, you can contribute the lesser of up to 25 percent of compensation or $49,000. The maximum anyone can contribute in a year -- as an employer or as an employee -- is $49,000, or $54,500 for those 50 and older.
The money is a tax deduction for your business, and this year, the government is kicking in up to an additional $500 to offset what it costs you to set up the plan.
The deadline for setting up a single 401(k) is Oct. 1, but as Stuart Robertson, general manager of ShareBuilder 401k, which offers these retirement plans, points out, getting them set up will take at least a week. So if a single 401(k) sounds appealing, now's the time to start the process.
The government requires you to use an employer identification number, or EIN, to set up and contribute to your single 401(k) instead of using your Social Security number, even if you file taxes as a sole proprietor. That process is simple. You can apply online or by phone and have the number in minutes. Once you have an EIN, you don't have to use your Social Security number for things related to your business, which is a great security feature.
Setting up a single 401(k) can be complicated. I set up one of these a few years ago when they were a brand-new option. I did it without help from my accountant husband and without considering what the investment options available to me would be. When I realized, I had made a bad choice, I asked my husband to help me unwind it -- something I'm still hearing about.
If I had it to do over, I would have dumped the whole business in his lap to begin with. And if I weren't married to my accountant, I'd still get an accountant's help. Getting it right the first time is worth the expense.