Individual 401Ks are available to small businesses that are owner operated. Typically individual 401Ks are utilized by small businesses that have no employees or employ only immediate family members. There are some instances where a small business that has a few employees can use individual 401Ks. Talking with an unbiased financial advisor about your situation will help determine if individual 401Ks are right for you.

Individual 401Ks are similar in structure to 401K programs commonly used by large businesses. Individual 401Ks are less cost prohibitive for a small business than its more common counterpart. The fees involved with individual 401Ks vary among different providers. An independent financial company will often have a very competitive fee structure.

Tax Benefits of Individual 401Ks

Individual 401Ks allow a small business owner to invest money for retirement and deduct the contribution from taxable income. Like most retirement plans there is a limit as to how much you can invest on an annual basis. Individual 401Ks have a higher limit than most retirement plans. In some instances an individual can contribute up to $41,000 in one year. The opportunity for larger contributions not only reduces taxable income but also offers an opportunity for large compounded growth.

The investments grow tax deferred allowing for maximum growth potential without annual capital gains taxation. Early withdrawals, however, may be subject to a penalty and income tax. Individual 401Ks do provide an opportunity for the owner of the plan to take out a tax-free, penalty free loan. I would recommended visiting with a financial consultant to determine not only how much you can contribute, but how and when the funds may be available to you.

One of the great things about individual 401Ks is the flexibility of the plan. These plans do not have a set minimum that must be contributed to the plan every year. In fact, the contributed amount can vary every year. Most larger 401K programs have fewer investment options than individual 401Ks. The larger selection of possible investments allows for easy diversification of your retirement portfolio.