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November 26, 2010

Individual (solo) 401(k) for the self-employed

Janet Kidd Stewart’s recent article reminded me how frequently solo business owners, whether ot not incorporated, tell me they have never heard of these plans.  These plans permit contributions of the 401(k) deferral, currently $16,500, plus the annual limit for a profit sharing (defined-benefit plan).  The calculation for a sole proprietorship differs from the one for a corporation.  Unlike other plans, such as a SEP, these plans must be established by the end of the tax year.  That would be December 31 if a calendar year is used for the business.  Although these plans allow a greater contribution, they do not require any contribution.  The contribution is not required to be paid by year-end.  It must be paid by the due date, as extended, for the tax return.  That is, individual (solo)plans provide added flexibility.  As with any tax and financial planning opportunity you must see how it impacts your individual situation.

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