If you are employed by a company that offers a 401(k) plan, it is best that you go through your employer to fund it, since you will accumulate savings faster. However, if your employer does not offer a plan or you are self-employed, you can set up your own plan. This type of retirement plan is called a solo 401(k) plan or independent 401(k) plan.

In order to invest in a solo 401(k), you must meet certain requirements. The first requirement stipulates that you and not an employer are responsible for your income. Sole proprietors, small business owners without employees (though spouses can contribute if they work for the business), independent contractors and freelancers are the ideal solo investors. The second factor that must be met is presence of income. This can be verified through tax records. If you meet both criteria, you can open a solo 401(k) plan.

Specific Steps

According to the Internal Revenue Service, there are specific steps that must be taken in order to properly open a solo 401(k) plan. First, you have to adopt a plan in writing, which means you have to make a written declaration of the type of plan you intend to fund. You can choose between two types of retirement plans: traditional and Roth. With a traditional individual plan, you invest your dollars pre-tax, then when you reach retirement age, you pay taxes on the funds as you withdraw them. This allows you to invest more money upfront while lowering your taxes while you are still working.

The downside to this is that when you are ready to withdraw your money, the tax rate could be higher than when you initially invested and the additional tax burden might erase any tax benefits received previously.

Roth plans are funded with after-tax dollars. This could mean you have less to invest while still working, but since you've already given the IRS its cut, the plan's earnings are all yours when it's time to retire.

CNN Money points out another benefit to the solo 401(k): Unlike an SEP IRA, another tax-advantaged account often recommended for small businesses/self-employed types, you can give yourself loans from the plan. It's not advisable to borrow from your retirement fund, but it's a decent option to have in case you need some quick cash.

Once the type of plan has been established, you will need to create a trust that will hold the funds until you need them or you reach retirement age. According to the IRS, you can select an investment firm or insurance company to manage the plan for you. You will also need to establish an excellent record-keeping system for the plan so all investments are accounted for at all times.

Just because you are a one-person outfit, a freelancer or an independent contractor, you don't have to go without a retirement plan. With proper planning and diligence, you will be able to enjoy a comfortable retirement after years of being your own boss and working on your own terms.