If you are considering self-employment but you are wondering about how to save for retirement, don’t worry there is an individual 401k plan for you. It is similar and different from a standard Individual Retirement Account or a Roth IRA in some significant ways.
The first similarity is that you can choose to fund the individual 401k with pre-tax earnings. This is similar to a standard IRA. You can instead opt to fund it with post-tax dollars, as in a Roth IRA. This is a very nice feature. With a standard, company-sponsored 401k plan, you only get to use pre-tax dollars. Another excellent feature of an individual 401k plan is that you get to contribute more than in a group plan. Since to the government you are both employee and employer, you can contribute up to $46,000 in a calendar year.
There are a few items in the minus column when it comes to individual 401k versus company-sponsored 401k plans. First the choices of funds to use is limited. Regular 401ks and standard IRAs have what seems like a universe of possible funds to pick. Not so with individual 401ks and this is because the paperwork, the bureaucracy, is a bit heavy so not every house wants to bother with offering this sort of plan.
Fees are another minus. The solo 401k fees are higher. This makes sense, if you think about it. With a group 401k, the fees are spread around among hundreds of employees. With an individual 401k, it is just you. So when you are shopping for a brokerage house, ask about the fees and don’t stop asking until you have all the facts.
For my money, the benefits of opening an solo 401k far outweigh the detriments. The flexibility and the increased contributions alone make it worthwhile, in my book. If you are on the fence, trying to decide what to do, just take a moment and imagine yourself on the golf course in 25 years. As you tee off, you think back to the day you decided to get serious about saving for retirement and you break into a big smile.