What's the Point of a 401(k) If You're Self-Employed?

If you’re self-employed, looking into the vast array of retirement options out there may seem daunting with everything from SEP IRAs to SIMPLE IRAs to 401(k) plans.

When considering all your options for your retirement plan, what makes pursuing the 401(k) plan worthwhile?

Free Retirement Calculator: When Can You Retire? — Click Here to Find Out

The individual 401(k) plan, also known as the solo 401(k), the solo (k), the one-participant k, or the uni-k plan, functions very similarly to the traditional 401(k) plans offered by larger companies to their employees. But instead, the business owner acts as both the employer and the employee in the individual 401(k) plan, which also allows the owner’s spouse to contribute if the spouse earns income from the same business.

With this plan, you may contribute to your elective deferrals as much as 100 percent of compensation in the yearly contribution limit, according to the IRS. You may not exceed $53,000 in total contributions to your account, according to the 2015 regulations, and you may give your employer non-elective contributions up to 25 percent of your net earnings.

The tax benefits for the 401(k) plan include tax-deferred growth, pre-tax employee deferral contributions, and tax-deductible contributions.

How Soon Can You Retire? Free Test Shows You When — Click Here

If you withdraw money from your account in the future, it will be taxed in accordance with the current higher or lower tax rates at that time. Unlike SEP IRAs (Simplified Employee Pension IRAs), individual 401(k) accounts would allow you to borrow against your savings.

CNN Money notes a 401(k) may be a good idea to look into if you plan to invest large sums of money because it allows you to contribute a large sum of money by adding, as the business owner, your own additional 25 percent of compensation.

Although there are pros and cons to every self-employment retirement plan, the 401(k) does generally allow for higher contributions than SEP IRAs or SIMPLE IRAs (Savings Incentive Match Plan for Employees).

An Extremely Simple Way to Determine If You're Ready to Retire — Find Out Now

Related Stories:

• What Is a Stretch IRA?
  
• Facts About Oklahoma’s 529 Plans