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How to Set Up a Solo 401(k) Retirement Plan

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Sole proprietors were once at a disadvantage when it came to retirement savings. SIMPLE IRA plans don't allow as much in contributions as 401k plans. The solo 401k became a new retirement savings vehicle for sole proprietors as a result of the Economic Growth and Tax Relief Reconciliation Act of 2001. As of 2010 IRS regulations, a sole proprietor can contribute up to $16,500 annually, $5,000 more than a SIMPLE IRA plan. These are important considerations when opening any retirement savings plan.

Find a 401k plan administrator that works with small businesses. Many banks and brokerage firms offer administrative services.

Confirm that the solo 401k is the best option for your personal and business needs. While it allows more contributions than a SIMPLE IRA, it may be more expensive in some instances.

Choose the traditional or Roth structure for the 401k. The IRS allows the plan owner to choose whether the money should be in tax-deferred growth or tax-free growth of a Roth 401k.

Complete a solo 401k account application. The paperwork includes company information, the tax-structure and the adoption agreements for the plan participant, you.

Sign and submit the adoption agreement. While contributions can be made up until the business tax filing date, the amount you are able to contribute is based on income earned by the end of the calendar year. You must have earned income equaling or more than the amount contributed.


Speak with a tax professional regarding the best retirement structure for you and for your business.

About the Author

With more than 15 years of professional writing experience, Kimberlee finds it fun to take technical mumbo-jumbo and make it fun! Her first career was in financial services and insurance.

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