Loading the player...

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".

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(k) Plan

    A qualified plan established by employers to which eligible employees ...
  2. Roth 401(k)

    An employer-sponsored investment savings account that is funded ...
  3. Sole Proprietorship

    The sole proprietor is an unincorporated business with one owner ...
  4. Designated Roth Account

    An individual retirement plan in which employees can have all ...
  5. Employee Contribution Plan

    A company-sponsored retirement plan where employees may elect ...
  6. Opt-Out Plan

    A type of 401(k) plan that automatically enrolls the employees ...
Related Articles
  1. Retirement

    Independent 401(K): A Top Retirement Vehicle For Sole Proprietors

    This vehicle has several advtanges over the SEP IRA. Find out why it's often a better alternative.
  2. Investing

    Understanding 401(k)s and All Their Benefits

    A quick guide to understanding 401(k) advantages, from tax savings to shelter from creditors.
  3. Financial Advisor

    Which 401(k) Plan is Right for You?

    An overview of the different types of 401(k) plans and how to choose the right one.
  4. Retirement

    401(k) Contribution Limits in 2016

    Find out what the contribution limits are for 401(k) retirement savings plans in 2016, including individual, employer and aggregate limits.
  5. Retirement

    401(k) Investing for Military Veterans

    Military personnel have access to a thrift savings plan, which is similar to a 401(k) plan.
  6. Retirement

    Introduction To SIMPLE 401(k) Plans

    Learn about the features and benefits of the plan that is a cross between a SIMPLE IRA and a traditional 401(k) plan.
  7. Retirement

    3 401(k)s With the Lowest Expense Ratios

    Discover how to Identify the fees and expenses associated with 401k investing and how it will affect your bottom line in investing.
  8. Financial Advisor

    Solo 401(k) vs. SEP: Which is Best for Biz Owners?

    Owners of small businesses have several choices when it comes to saving for retirement. When does it make sense to choose a Solo versus SEP plan?
  9. Retirement

    Capital One Launches Small-Business 401(k) Plans

    Capital One Spark 401k joins growing list of retirement plan providers for small businesses.
  10. Small Business

    Boost Retirement Savings With a Solo 401(k)

    For the self-employed or small business owner, a solo 401(k) is a valuable retirement plan.
RELATED FAQS
  1. Is an individual/independent 401(k) a qualified plan?

    Surpassing the SEP IRA plans previously popular with self-employed individuals, the individual 401(k) plan is a qualified ... Read Answer >>
  2. Who is eligible for an independent/individual 401(k)?

    Contribute to an independent or solo 401k plan to capitalize on the opportunity to save as much money as possible toward ... Read Answer >>
  3. What are the contribution limits of a 401(k) vs. a Roth 401(k)?

    Learn to choose correctly between a 401(k) and a Roth 401(k) retirement plan to maximize the amount of money available to ... Read Answer >>
Hot Definitions
  1. Tender Offer

    An offer to purchase some or all of shareholders' shares in a corporation. The price offered is usually at a premium to the ...
  2. Ponzi Scheme

    A fraudulent investing scam promising high rates of return with little risk to investors. The Ponzi scheme generates returns ...
  3. Dow Jones Industrial Average - DJIA

    The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange ...
  4. Revolving Credit

    A line of credit where the customer pays a commitment fee and is then allowed to use the funds when they are needed. It is ...
  5. Marginal Utility

    The additional satisfaction a consumer gains from consuming one more unit of a good or service. Marginal utility is an important ...
  6. Contango

    A situation where the futures price of a commodity is above the expected future spot price. Contango refers to a situation ...
Trading Center