Independent 401(k)

AAA

DEFINITION of 'Independent 401(k)'

A 401(k) plan set up for an individual running a sole proprietorship or a small business with a spouse/immediate family member. Plan contribution limits for the individual are equal to a typical company-sponsored 401(k), but the sole proprietor can also make an employer contribution to an independent 401(k), thereby raising the total contribution allowed.

The independent 401(k) may also be called a "solo 401(k)" or an "indie K".

INVESTOPEDIA EXPLAINS 'Independent 401(k)'

As with standard 401(k) plans, catch-up contributions are allowed for those above age 50 who have indie 401(k)s - up to $5,000 in 2006. Contributions made to the plan as an employer are also tax-deductible, which can help to save the sole proprietor a great deal in taxes.

The independent 401(k) offers many of the same features as a Keogh plan or an SEP IRA, but an independent 401(k) can be cheaper to establish and maintain, and loans are often allowed against an independent 401(k).

The major drawback to the independent 401(k) is that no outside employees can be hired, or the window of applicability closes.

VIDEO

Loading the player...
RELATED TERMS
  1. 401(a) Plan

    A money-purchase retirement savings plan that is set up by an ...
  2. KSOP

    A qualified retirement plan that combines an employee's stock ...
  3. Opt-Out Plan

    A type of 401(k) plan that automatically enrolls the employees ...
  4. Roth 401(k)

    An employer-sponsored investment savings account that is funded ...
  5. Plan Sponsor

    A designated party, usually a company or employer, that sets ...
  6. Tax Deferred

    Investment earnings such as interest, dividends or capital gains ...
RELATED FAQS
  1. Who is eligible for an independent/individual 401(k)?

    A business owner who operates his or business with the intent of making a profit and does not hire full-time employees is ... Read Full Answer >>
  2. What are the benefits of an independent/individual 401(k)?

    An individual or independent 401(k) retirement account is no different from a traditional 401(k) account in its structure ... Read Full Answer >>
  3. I have a small business (LLC), which I operate part-time. I also work full time for ...

    As long as you have no ownership in the company for which you work full-time and the only relationship you have with the ... Read Full Answer >>
Related Articles
  1. Entrepreneurship

    Business Owners: How To Set Up An SEP IRA

    SEP IRAs are simple to set up and run, making them a popular choice for business owners.
  2. Retirement

    Is Your 401(k) On Track?

    Small adjustments can have a significant impact on your returns. Learn what to watch for.
  3. Retirement

    Sometimes It Pays To Borrow From Your 401(k)

    401(k) loans have been demonized, but they're often the most beneficial source of cash.
  4. Entrepreneurship

    401(k) Plans For The Small Business Owner

    If you own a business, this may be the plan for you! Find out about its benefits and eligibility requirements.
  5. Professionals

    New 401(k) Pension Rollover Rule: Pros and Cons

    Is the new rule allowing participants to roll their 401(k) balances into pensions a good idea?
  6. Investing Basics

    Are You Investing With A Purpose?

    We all appreciate having a wide variety of investing choices, but a random collection of investments does not make an investing plan.
  7. Retirement

    Strategies To Build Your Retirement Portfolio

    Retirement indexes are designed to estimate how much an investor would need to have saved today to generate annual income in retirement, starting at 65.
  8. Retirement

    Tapping Retirement Funds Early – Without A Penalty

    The IRS offers several ways to skirt the 10% penalty on early retirement distributions.
  9. Professionals

    Why Auto-Enrollment Will Save Your Retirement

    Savers need all the help they can get, even if it amounts to an offer they can't refuse. That's why the biggest improvement to 401(k)s is auto-enrollment.
  10. Professionals

    Retirement Planning Essentials for Your Clients

    You may have heard these retirement planning tips before, but has your client actually put them into action yet?

You May Also Like

Hot Definitions
  1. Fixed-Charge Coverage Ratio

    A ratio that indicates a firm's ability to satisfy fixed financing expenses, such as interest and leases. It is calculated ...
  2. Efficiency Ratio

    Ratios that are typically used to analyze how well a company uses its assets and liabilities internally. Efficiency Ratios ...
  3. Fixed Cost

    A cost that does not change with an increase or decrease in the amount of goods or services produced. Fixed costs are expenses ...
  4. Subsidy

    A benefit given by the government to groups or individuals usually in the form of a cash payment or tax reduction. The subsidy ...
  5. Sunk Cost

    A cost that has already been incurred and thus cannot be recovered. A sunk cost differs from other, future costs that a business ...
  6. Technical Skills

    1. The knowledge and abilities needed to accomplish mathematical, engineering, scientific or computer-related duties, as ...
Trading Center