What is an individual or a solo 401(k)?
Also called as Uni-401(k) plan, an individual 401(k) plan is an Internal Revenue Code (Section 401) approved a qualified plan for retirement which is specifically designed for self-employed or sole-owned businesses. Similar to traditional IRAs, this plan offers cost-effective and tax-efficient investment options along with a few additional benefits. Although any business model which meets the criteria is eligible under this plan, it is most suitable for independent contractors, consultants, real estate agents etc. Initial funding for this plan can be done through rollover funds from traditional IRAs, SEP plans, previous 401(k) plans, profit sharing plans, defined benefit plans, 403(b) plans etc. by setting up new trust account or by transferring all the funds to the current custodian trust account.

Benefits of an individual 401(k) plan:
Taxes can be reduced on contributions and the earnings can grow by deferring the tax. Assets are tax-free until withdrawal at retirement.
As the plans and agreements are customized by self, the administering requirements are fewer and simple compared to that of traditional plans.
No complications of filing a Form 5500 unlike the traditional 401(k) plans to be IRS compliant until the plan reaches $250000.
Unlike the traditional 401(k) plan, there is no vesting schedule for the business as one would be vested immediately.
Additional tax deferrals can be made by representing the spouse of self and spouse of partner(s) as part of the business.
Funding can be a combination of salary deferrals and annual profit sharing contributions. A participant can control the way investments are made and not necessarily be an annual contribution.
It allows an individual to borrow tax-free loans from the retirement funds based on certain terms and conditions.

Rules for withdrawing from the plan:
An individual should either end the employment or retire to be able to make any withdrawals.
A penalty of 10% will be levied for withdrawals made before the age of 59.5.
All distributions other than RMDs, hardship withdrawals, and direct rollovers will be subjected to a 20% federal tax withholding.
One must start to take an annual RMD from the age of 70.5 if he/she owns 5% share in a business. Failing which, a penalty of 50% on the total distribution will be applicable.
The contribution is limited to $54000 ($60000 for those above 60 years of age) for the tax year 2017.
An annual IRS form 5500 is required to be filed when the assets become equal or greater than $250000.

Funding deadlines:
For Solo 401(k) plan establishment- 31st December or end of FY, whichever is earliest.
For salary deferrals- End of the business tax year.
For profit-sharing contributions- Tax filing date of the business (Any extensions will be added).

A 401(k) retirement plan is one of the best tools for working people and employees of a company for creating a secure retirement fund. For employees, the advantages are pretty obvious earnings and contributions to the 401(k) are tax deferred and secondly, employers tend to provide matching contributions to the 401(k) account (ranging from 0-100% of employee contributions). Listed below are the best practices for an employee’s 401(k) retirement planner:

Think about a Roth 401(k): Employees can invest taxed money in a Roth 401(k). Hence, those funds aren’t taxed when you withdraw them during retirement. If you’re beginning with a low salary which will rise later, it’s better to take the tax hit before than later. Alternately, if you expect your income to decline, a regular 401(k) will suit you better. The best thing will be if you have access to and can afford and contribute to both types, thus hedging your bets.

Sticking to the plan: It’s easy to create a long-term investment plan and change it frequently. However, the ideal asset allocation strategy is to choose a mix of funds and stick to the plan even if the market falters it will pay off in the long run.

Investment advice fees: Free investment advice never hurts. However, if you’re paying someone a percentage of your portfolio to guide you through the choices and the process, you should understand that if you’re a young investor with limited assets, it’s probably not worth it. Instead, go in for the free guidelines and online calculators that many companies offer, to start with.

Not touching the 401(k) before retirement: Dipping into the 401(k) nest egg is tempting, but do not so it. Not only will you end up paying taxes and extra fees, but you’ll also lose out on possibly compounded returns. Leave your 401(k) alone so that your profits can be reinvested, which will enable your nest egg to grow exponentially year after year.

Rolling over funds when quitting job: If you are quitting your job, it is very tempting to ask the employer to cut you a check for the 401(k) money, but it’ll cost you huge amounts in penalties and taxes. Instead, leave the account as it is to gain maximum from it. However, if you are asked to leave the company’s retirement plan altogether, roll the funds into the 401(k) at your new job or into an IRA. That way, your retirement nest egg continues to grow and is safe.

A 401(k) is a deferred tax saving plan where the employees of an organization/business save a part of their salary in 401(k) funds, for which she/he will not be required to pay taxes until the age of retirement. Here, both the employer and the employee will be allowed to make contributions into the fund. An individual 401(k) plan covers only the business owners, partners and their spouses thus freeing them from the complexities of the ERISA rules. They receive similar tax benefits as the general 401(k) plan, but without the involvement of the employer as compared to general 401k plans. It is specifically designed for businesses without full-time employees, and is for a self-owned or a self-employed business. Hence, it is also called Solo 401(k) plan or Self-employed 401(k) or one-participant 401(k) plan.

The contributions under this plan are similar to a general 401(k) plan where the profit sharing contribution is made by both the employer and the employee. Different contribution caps are available for different types of businesses. But, since in most cases, both the employer and the employee are the same, the contribution can be slightly higher. Also, provisions are available for additional contributions for plan holders who are above 50 years of age.

Basic qualification for an individual 401(k)

• An individual claiming to qualify for this plan must have some self-employed income either part-time or full-time.
• This plan can be claimed by an individual from any type of business- single owner, self-employed, partnership, company with limited liability, corporations etc. where she/he should have at least 5% share in the business.
• The business claiming this plan must not employ anyone full-time who is eligible to participate in Solo 401(k) (Except those employees who are below 21 years of age, expats and union members with certain benefit plans). Only the owner/partners and their spouses can claim under this plan.

Types of individual 401(k) plans
These are classified based on the documents and the agreement that states and controls the operations of the plan. The employer can customize the plan agreement according to the options available in the basic plan offered by a plan sponsor. A plan sponsor is a company that offers a plan to the employer, either as an individual designed plan or a prototype plan. There are two types of solo 401(k) plans where an investor can select a plan based on her/his investment goals, asset preferences, fee schedules and the level of control desired.

• Brokerage based 401(k) – The available investment options under this plan are limited, and offers market based assets like stocks and mutual funds. This plan does not allow loans of any kind.
• Self-directed 401(k) – This plan provides more investment options and allows for alternative assets like investment in real estate, private business, precious metals, personal loans and all other options offered by a Roth deferral However, collectibles are not allowed under this plan. This also allows for conversion of general 401(k) accounts to a Roth sub-account.

Not all 401(k) plan participants are completely educated about their 401(k) plans and really do have a lot of misconceptions about it. So how much do you really know about your 401(k) plan? Let’s find out.

The entire 401(k) account is mine when I quit the job: This is one of the biggest mistakes one could make in his/her 401(k) retirement planner. This may OR may not be true, depending on your 401(k) plan’s vesting schedule.While your own (Roth/pre-tax) contributions to the plan are always yours to keep, it is not always the case with employer contributions. While some employer contributions are also owned by employees, there are others which require employees to have up to 6 years of service before they’re entitled to employer contributions completely.

The 401(k) is a great method to save for first home, college, etc.: Many people think that 401(k) plans can be used for other major things such as paying for a down payment for a home or for college tuition. However, 401(k) plans should be solely focused on retirement nest eggs and savings. If you want to fund your child’s college education, try the 529 plan, but leave your 401(k) alone because if any dire need arises in the future, you’ll be left without savings.

Contribute to my 401(k) plan doesn’t allow me to contribute to an IRA: Employees need to understand that 401(k)s and IRAs are different and their contributions to a 401(k) plan have no effect on if they wish to contribute to a Roth or a traditional IRA. However, one needs to remember that their/their spouse’s participation in a 401(k) plan, depending on their joint income, may unfavorably impact their capability to deductcontributions to a traditional IRA.

Minimum contributions to 401(k) are the maximum company match: Many employees believe that they should contribute to the 401(k) just only how much the company contributes, which is 6%. The result is just 6% in employee contributions, which should ideally be an average of 15% at least, and forget about how much the employer is contributing.

Two jobs with two 401(k)s allow me to defer up to $18,000 per plan: This is a smooth assumption on part of the employee, but that is not the case. The limit is $18,000 deferment limit on ALL your employer plans including the 401(k), Simple plans, SARSEPs and 403(b)s (excluding 457(b)s). If you’re lucky enough to have both a 401(k) and a 457(b), you can defer up to a maximum of $36,000 in 2017 (excluding catch-up contributions).

The 401k is one of the most widely-used retirement savings accounts. It is established by the employers for their employees to meet their retirement goals. 401k is eligible for tax benefits as it is a qualified plan. As of 2017, under the 401k plan, the maximum pre-tax contribution that an employer or any person can make to their plan is $18,000.

Contribution To 401k
In a 401k plan, you can make contributions from part of your employment earning which can be made before or after payroll taxes. Once the contributions are in your account, the profits made from investing these funds grow on a tax. This means that if you make any sort of pretax contributions from your pay, you will pay taxes on your pay/income until you withdraw them when you end up retiring. This allows to reduce your current taxable income and put off those taxes into your retirement when you are likely be in your lower tax bracket.

Roth 401k Plan
The Roth 401k plan allows you to make after tax contributions. so, you won’t pay tax when you pull the money out after you retire. But, you need to hold the money in the plan for the minimum a number of years before withdrawing it after retirement.

Limitations
Some employers also match the amount an employee could send into the account or offer other incentives like profit sharing, this is a great way to boost your savings, but the IRS does set limits on how much you can contribute to these plans and also set restrictions on how and when you can withdraw the funds.

Time of maximum benefit
Because of their tax advantages 401k plans can help to grow your retirement savings much faster than saving and investing without them. If you start contributing early and wisely, the 401k plan will help you leverage time and reduce taxes while achieving your retirement goals.

How to handle a 401k while changing jobs
Don’t pull out all the money as yet, though it may be tempting to do so. Instead, put the money in a tax-preferred account. You can leave the money untouched, move the balance to a new employer’s 401k plan or roll it over to an individual retirement plan. Do weigh in all the options before making a final decision. Look for investment options with low costs. Shop thoroughly and take a look at all options available.