Exploring the Single 401K

Many self-employed entrepreneurs may want to save for retirement using either an IRA, Roth IRA, SEP (Simplified Employee Pension), or SIMPLE IRA. A Single 401(k) maybe a better option due to higher contribution limits. For 2013, a business owner can make elective deferral contributions of up to $17,500 plus $5,500 if they are over age 50. Additionally, they can receive an employer contribution of 20% of net self-employment income or 25% of compensation. This total cannot exceed the lesser of 100% of compensation or $51,000. The catch up amount of $5,500 is not included in these overall contribution limits. As an additional benefit, a business owner can borrow from his 401(k) plan if the document allows it; unlike the SIMPLE IRA, IRA, or Roth IRA. A Single 401(k) also allows for Roth 401(k) contributions which the SIMPLE IRA does not offer. This allows for post-tax contributions, but tax-free withdrawals at retirement. The traditional IRA and Roth IRA have much lower contribution limits of $5,500 plus $1,000 catch up if over age 50. To get a jump start on retirement savings, self-employed individuals should look to the Single 401(k).
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Don Hannahs has been a Financial Advisor since 1987. He is a founding partner of Planning Solutions Group, LLC. His practice focuses on high net worth business owners, physicians, and retirees in the areas of wealth management, business continuity planning, fringe benefit design, and qualified plan analysis. Don is a CERTIFIED FINANCIAL PLANNER™ (CFP®) who has clients throughout the Mid-Atlantic region and Florida.