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

RELATED TERMS
  1. 401(a) Plan

    A money-purchase retirement savings plan that is set up by an ...
  2. 401(k) Plan

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

    Investment earnings such as interest, dividends or capital gains ...
  4. Roth 401(k)

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

    A qualified retirement plan that combines an employee's stock ...
  6. Plan Sponsor

    A designated party, usually a company or employer, that sets ...
Related Articles
  1. What are the benefits of an independent/individual ...
    Retirement

    What are the benefits of an independent/individual ...

  2. I have a small business (LLC), which ...
    Entrepreneurship

    I have a small business (LLC), which ...

  3. Business Owners: How To Set Up An SEP ...
    Entrepreneurship

    Business Owners: How To Set Up An SEP ...

  4. 401(k) Plans For The Small Business ...
    Entrepreneurship

    401(k) Plans For The Small Business ...

comments powered by Disqus
Hot Definitions
  1. Ratio Analysis

    Quantitative analysis of information contained in a company’s financial statements. Ratio analysis is based on line items ...
  2. Days Payable Outstanding - DPO

    A company's average payable period. Calculated as: ending accounts payable / (cost of sales/number of days).
  3. Net Sales

    The amount of sales generated by a company after the deduction of returns, allowances for damaged or missing goods and any ...
  4. Over The Counter

    A security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, etc. The phrase "over-the-counter" ...
  5. Earnings Before Interest After Taxes - EBIAT

    A financial measure that is an indicator of a company's operating performance. EBIAT, which is equivalent to after-tax EBIT ...
  6. Direct Participation Program - DPP

    A business venture designed to let investors participate directly in the cash flow and tax benefits of the underlying investment. ...
Trading Center