Up until recently, it didn't make sense for the self-employed to establish 401(k) plans. Small-business owners could usually just as much as a 401(k) through a Keogh, SEP or SIMPLE IRA - without the costly setup and maintenance fees, complex rules, and burdensome administration associated with 401(k) plans.

Owner-only businesses can now establish solo 401(k) plans that in some cases allow them to put away two to three times the amount allowed by other tax-deferred plans. Here's an example of how this new, simplified retirement option stacks up against the competition:

Elizabeth owns an unincorporated business and has self-employment income of $100,000. By establishing a solo 401(k), which many know as “Individual-K", she can put away as much as $33,000 in 2004 - or $36,000 if age 50 or older. This total amount is tax deductible and all earnings grow tax-deferred until withdrawn and are available for loans immediately.

How does this compare with the maximum deductible contributions allowed under other plans in 2005? It surpasses them all. Keogh plans and SEP-IRAs max out at $20,000, and the SIMPLE IRA at $10,000 ($12,000 if age 50 or older).

The Individual 401(k) contribution totals include employer and salary deferral contributions. If your business is incorporated, the employer contribution is based on your W-2 income and is capped at 25% of compensation. It is not subject to federal income tax or Social Security (FICA) taxes. The salary deferral contributions are withheld from your pay and are excluded from federal income tax, but are subject to FICA. The maximum salary deferral amount for 2005 is 100% of pay up to $14,000 - or $18,000 if you are age 50 or older. Your business receives a tax deduction for both employer and salary deferral contributions. Employer contributions plus salary deferral contributions cannot exceed $41,000 ($44,000 if age 50 or older) or 100% of compensation.

Solo 401(k)s have many benefits beyond generous contribution limits. Consider the following:

• You decide each year whether to contribute and how much to contribute.
• Unlike traditional 401(k) plans, there are no complicated discrimination tests or administrative requirements. Among the few administrative requirements is an IRS Form 5500 filing - but only after plan assets exceed $100,000.
• You can take loans tax-free and penalty-free - under the same guidelines available to large corporate 401(k) plans. This is great for those needing access to their retirement funds before age 59½.
• Retirement assets from other qualified retirement plans can be consolidated to create one convenient, low-cost account.

The solo 401(k) is a new planning opportunity is available to any business that employs only owners and their spouses, including C corporations, S corporations, partnerships and sole proprietorships. It is not suitable for businesses with employees, or those that plan to hire additional employees in the future. When considering an investment plan, it is important to remember that investment returns and principal value fluctuate and shares, when redeemed, may be worth more or less than original cost.

Is an Individual 401(k) right for you? If you're a real estate broker, lawyer, accountant, electrician, or a member of one of the dozens of other self-employed professions, you owe it to your future to explore the advantages of a solo 401(k).

Check with your Certified Financial Planner™ professional

Troy Smith, CFP^® offers financial planning services to clients in Raleigh, Cary, Durham, Chapel Hill, Apex, and throughout the Triangle area. For more information, go to www.asktroy.com.

DISCLAIMER: This article is intended to serve as a basis for further discussion with your professional advisers. Competent legal and tax advisers should be a part of every sound financial plan. This information is not intended as legal or accounting advice and should not be relied upon in the preparation tax returns or when making any business or personal financial decisions. You should always seek the counsel of your advisers to understand how this information applies to your particular facts and circumstances. Mutual fund and 401(k) investing carries risks. Investment returns and principal values fluctuate and shares, when redeemed, may be worth more or less than original cost.

All investments contain some degree of risk and an investor should carefully consider the risks associated with certain investments. The return and principal value of an investment in stocks, bonds and mutual funds fluctuate with market conditions and, when sold, may be worth more or less that the original amount invested. Bonds are subject to market risk and may be worth more or less than the original cost upon redemption or maturity. Investments in higher yielding, lower rated bonds are subject to more risk than lower yielding, higher rated bonds. Indexes are hypothetical portfolios of specified securities, the performance of which is used as a benchmark in judging the relative performance of securities. Indexes are unmanaged portfolios and do not guarantee future performance. It is not possible to invest in an index.