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".

VIDEO

Loading the player...

BREAKING DOWN '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.

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. Roth 401(k)

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

    A designated party, usually a company or employer, that sets ...
  5. 401(k) Plan

    A qualified plan established by employers to which eligible employees ...
  6. Tax Deferred

    Investment earnings such as interest, dividends or capital gains ...
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. Investing

    Five Things to Consider Now for Your 401(k)

    If you can’t stand still, when it comes to checking your 401 (k) balance, focus on these 5 steps to help channel your worries in a more productive manner.
  6. Retirement

    Strategies for a Worry-Free Retirement

    Worried about retirement? Here are several strategies to greatly reduce the chance your nest egg will end up depleted.
  7. Professionals

    Your 401(k): How to Handle Market Volatility

    An in-depth look at how manage to 401(k) assets during times of market volatility.
  8. Professionals

    How to Build a Financial Plan for Gen X, Y Clients

    Retirement is creeping closer for clients in their 30s and 40s. It's a great segment for financial advisors to tap to build long-term client relationships.
  9. Professionals

    Don't Let Your Portfolio Be Trump'd by Illiquidity

    A look at Donald Trump's statement of finances and the biggest lesson every investor can learn.
  10. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
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 >>
  4. Can my IRA be used for college tuition?

    You can use your IRA to pay for college tuition even before you reach retirement age. In fact, your retirement savings can ... Read Full Answer >>
  5. Why are IRA, Roth IRAs and 401(k) contributions limited?

    Contributions to IRA, Roth IRA, 401(k) and other retirement savings plans are limited by the IRS to prevent the very wealthy ... Read Full Answer >>
  6. How do you calculate penalties on an IRA or Roth IRA early withdrawal?

    With a few exceptions, early withdrawals from traditional or Roth IRAs generally incur a tax penalty equal to 10% of the ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Dead Cat Bounce

    A temporary recovery from a prolonged decline or bear market, followed by the continuation of the downtrend. A dead cat bounce ...
  2. Bear Market

    A market condition in which the prices of securities are falling, and widespread pessimism causes the negative sentiment ...
  3. Alligator Spread

    An unprofitable spread that occurs as a result of large commissions charged on the transaction, regardless of favorable market ...
  4. Tiger Cub Economies

    The four Southeast Asian economies of Indonesia, Malaysia, the Philippines and Thailand. Tiger cub economy indicates that ...
  5. Gorilla

    A company that dominates an industry without having a complete monopoly. A gorilla firm has large control of the pricing ...
  6. Elephants

    Slang for large institutions that have the funds to make high volumes trades. Due to the large volumes of stock that elephants ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!