Manasa Nadig, EA
Manasa Nadig, EA

You did it! You quit your job and started that small business that had always been your dream! Exciting times, thrilling ups & downs, you are your own boss–but wait, you do miss the paychecks that arrived regularly every other week. You also miss the medical benefits that the company paid for & that retirement plan you contributed to. What’s more, you also miss that extra oomph on your paycheck-the employer contribution to the company 401(k).

In this post on Employer Retirement Plans for Small Businesses, let’s closely examine the Individual 401(k). This is also known as the Solo 401(k). Unlike other retirement plans, a solo 401(k) is only for sole proprietors or S Corps who have no employees. A spouse can contribute if he or she earns income from the business.
It comes in both the Traditional & Roth version. Just like IRA’s, Traditional is money put away pretax & is taxable when withdrawn. The Roth 401(k) is funded with after-tax dollars & is tax free when withdrawn. One can also split the contributions between the two. Loans can also be taken against savings in 401(k)’s.

Why I like these plans?

•They are ideal to sock away large amounts of money in the good years.

•It helps you save both as an employer & an employee. Here’s how for 2013 – you can contribute a maximum of $33500 (Up from $33000 in 2012) as an employer AND $17500 (Up from $17000 in 2012) as an employee- not to exceed a maximum of $51000 (Up from $50000 in 2012) or 100% of the employee’s compensation, whichever is lesser. Read More

Saving money can be a tricky proposition for many people.  The first step to saving is creating a budget  –   a detailed budget.  This is not a guestimate based on your recollection of prior month expenses; this needs to be an exact science.  First figure out your monthly income and then take out the taxes (payroll and income taxes).  If your withholding doesn’t cover your tax liability each year, consider changing your withholding so the monthly withholding covers all your taxes for the year.  From there I like to set aside savings.  Retirement may be 40 years in the future or it might be just around the corner, but saving for retirement is always one of my top priorities.

The tax code allows you some choices when saving for retirement.  Most employers offer a 401(k) plan and at least a partial match of your contributions.  If the employer is willing to match 6% of your salary, then the first place to save is 6% of your salary.  If you don’t, you are leaving money on the table right off the bat.  Nowadays many employees can choose between the Roth and traditional 401(k)s  –   the Roth/traditional works like the IRAs.  For a traditional you get a tax deduction when you put the money in, but it is taxed when you take it out in retirement.  For a Roth, the money is not deductible when it goes in and then it is not taxed when it comes out in retirement.  I prefer the Roth for most people, but to each their own depending upon the circumstances.  Keep in mind that you can make both a 401(k) and an IRA contribution.  Sometimes people think it is one or the other, but you can do both. Read More