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.

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.