- Is Individual 401(k) Profit Sharing a Pre-Tax Deduction?
- Can an Employee Roll Over a 401(k) Into a Self-Directed IRA While Still Employed?
- Can I Contribute to a Roth IRA After Maxing Out My 401(k)?
- Can I Max Both a 401(k) & an IRA?
- Can I Invest in a Roth 401 as Well as a 401(k)?
- Can I Shift After-Tax Funds From My 401(k) to a Roth IRA?
The self-employed 401(k) plan, also called the one-participant or "uni-k" plan, is a way for a self-employed business owner without any other employees to set money aside for retirement. These plans allow you to save significantly more money than some other plans, including IRA accounts. If you maximize your savings in a self-employed 401(k) plan, you can also contribute to a Roth IRA account, if you meet the guidelines for contributions.
Self-Employed 401(k) Limits
You can contribute up to 100 percent of your salary, up to a maximum of $17,500, to a self-employed 401(k) plan through salary deferral, as of 2013. If you are age 50 or older, you can increase that yearly contribution to $23,000. In addition to this contribution you make as the employee through deferred compensation, you can make a contribution to your self-employed 401(k) plan as the business owner of up to 25 percent of your compensation. However, the total contribution to the plan cannot exceed $51,000 from both sources.
A self-employed 401(k) plan will allow you to save more money each year than many other retirement plans, including an IRA. You can also choose to start a self-employed 401(k) as a traditional 401(k) or Roth account. A traditional self-employed 401(k) is funded pretax, and the contributions are subtracted from your salary, reducing your taxes when the contribution is made. You pay taxes on the money when you withdraw the funds at retirement. A Roth account provides no immediate tax benefit, but the withdrawals you make at retirement are tax-free.
Roth IRA Contributions
Roth IRA contributions are not limited just because you have coverage by an employer-sponsored plan. This is a key difference between a Roth IRA and traditional IRA, which limits deductible contributions if you are covered by an employer plan. Roth IRA contribution eligibility is limited only by modified adjusted gross income. If you are married and file a joint return, you can make a full Roth IRA contribution of $5,500 if you are under age 50 and your income is less than $178,000. Your eligible contribution is limited with incomes up to $188,000 and eliminated when you earn higher amounts. Single filers have lower limits.
Most financial experts recommend saving as much for retirement in tax-advantaged accounts as possible. The self-employed 401(k) also gives you a chance to fund a retirement account that you can borrow from if you need the money. Loans from an IRA are prohibited by federal tax laws.