SBO-401(k) is a tax-deferred, government-registered retirement savings plan that is specially designed for small business owners (SBOs). Eligible participants for an SBO-401(k) are businesses that employ the business's owners and their spouses. The business must not have any other eligible employees. Also known as an independent 401(k).
An SBO-401(k) provides self-employed small business owners the opportunity to participate in a tax-deferred retirement savings plan. These types of savings plans may be either self-directed or professionally managed.
As with standard 401(k) plans, catch-up contributions are allowed for those above age 50 who have SBO 401(k)s - up to $6,000 in 2018. 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 SBO 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.
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 With the traditional version, your tax-deferred money is only taxed when it is withdrawn; the Roth version involves putting away after-tax money and allowing it to grow tax-free with no taxes on withdrawal. 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.
The amount you can contribute under these plans is appealing. "The highlight of the Self-Employed 401(k) is the ability to contribute to the plan in two ways. For 2017, as an employee, you can make salary deferral contributions equal to the lesser of $18,000, or 100% of your compensation. If you're at least 50 years old, your savings options are even higher because you can add an extra $6,000 in catch-up contributions each year," notes investment giant Fidelity. "Then, as the employer, you can make a contribution of up to 25% of your compensation each year, up to a maximum of $53,000 in combined contributions each year (your combined employee and employer annual contributions can't exceed $59,000 if you are over 50)."
In addition, "if your business is not incorporated, you can generally deduct contributions for yourself from your personal income. If your business is incorporated, you can count the contributions as a business expense."