The 401(k) retirement plan is especially suitable for those people who are self-employed with no other full-time employees other than their spouse. In the case when those qualifications are met, the restrictive and costly 401(k) nondiscrimination rules do not apply and they save on contribution expenses and administration fees.

401 retirement plan and alternatives.

If you combine an individual 401(k) plan with a profit sharing plan you will get the opportunity to maximizing your benefit. That way you'll get the benefit of contributing your own money through the 401(k) deferrals, plus the company will add its matching and profit sharing contributions. It must be added, that the company can usually deduct the contribution as a business expense, saving you taxes both on the business and personal sides of the transaction. These contribution totals can quickly add up if maximized over a period of several years. 25% of total compensation could also be contributed by a corporation for the owner and spouse. This limit is a little less for unincorporated companies or sole proprietorships which are based on the individual's compensation amount. The 401(k) contribution does not count against the company's profit sharing contribution and vice versa.

To setting up an individual 401(k) and profit sharing plan have also other advantages. The contribution amount is discretionary, not fixed, and that allows you to decrease contributions during lean times. Loans and hardship withdrawals are also allowed under most 401(k) plans. Usually rollovers from other retirement accounts (IRAs, employer-sponsored plans) can be transferred into the 401(k), making recordkeeping and investing easier by consolidating everything in one account.

Some disadvantages are also possible to setting up an individual 401(k) plan. If you ever hire any full-time employees in the future it can become significantly more expensive. Then you would be asked to contribute on their behalf, as determined by the 401(k) non-discrimination rules. Be sure you will not need additional full-time help as your business grows before committing to an individual 401(k) plan.

A significant amount of paperwork is also involved with setting up a 401(k) or any type of retirement plan. Most companies simply pay an administration fee to a third-party pension firm or financial institution to handle the administration and tax filings for them. The fees for an individual 401(k) plan are usually only a couple hundred dollars because the owner and possibly a spouse are the only participants.

If don’t plan to have any full-time employees, because you are a small business owner, you should strongly consider setting up an individual 401(k) plan. Adding a profit sharing plan can increase the amount of your maximum contribution each year and will let you build up your retirement savings in a rather short term.

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