What Is an Independent 401(k)?

An independent 401(k) is a tax-advantaged retirement savings plan available to individual small business owners and their spouses.

The plan is a variation on the 401(k) plan offered by many large employers. Since, in this case, the employer and the employee are one and the same, the contribution limits for the independent 401(k) are higher.

Contributions made to the plan as an employer are also tax-deductible, which can save the sole proprietor a great deal in taxes.

The independent 401(k) is sometimes called a solo 401(k), an indie K, or a self-employed 401(k).


Introduction To The 401(K)

Understanding the 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. The maximum for that catch-up is $6,000 for the 2019 tax year, rising to $6,500 for the 2020 tax year.

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

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

Indie 401(k) Versions

There are two versions of the individual 401(k) plan: a traditional version and a Roth version.

With the traditional version, your tax-deferred money is only taxed when money is withdrawn. In the Roth version, after-tax money is paid in, and no further taxes are due when it is withdrawn.

You can use financial calculators to help determine the best option for you between the two versions of the individual 401(k) plan. It is also possible to opt for both and divide contributions between the two plans.

For the 2020 tax year, you can make a maximum combined contribution of $57,000 plus an extra $6,500 as a catch-up contribution if you are age 50 or older.

If your business is not incorporated, you can generally deduct contributions for yourself from your personal income. If your business is incorporated, the contributions can be counted as a business expense.