The Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001 made provision for creating the Individual 401(k) plan which has turned out to be quite an exciting plan for self employed individuals. The tax law that created the plan became effective from January 2002. The individual 401(k) plan is essentially a traditional 401(k) plan with some relaxation in the rules and regulations. This plan can be opted for only by self employed individuals. The individual 401(k) plan is also popularly known as solo 401(k), solo k or individual k.

With this plan, self employed business owners can save for their retirement by making tax deferred contributions and profit sharing contributions to their individual 401(k) account. What sets this plan apart from

other retirement saving plans for the self employed is that these plans have higher contribution limit than other plans. For the years 2009 and 2010, the total contribution limit (comprising of salary deferral and profit sharing contribution) is $49,000 if the person is of age 49 and below and $54,500 if the person is of age 50 and older.

Also, an added advantage of the individual 401(k) plan is that the person can choose as to how much contribution to make in a year or he/she can even skip contributing in that year altogether.

There are some points to be considered for eligibility of the plan.

• Only self employed individuals who do not have any employees can opt for the plan.

• If the owner’s spouse is part of the business or draws a salary from it, he/she can contribute to the plan as well.

• Self employed businesses that have employees who work more than 1000 hours a year do not qualify for the plan.

• Contractors hired by the business do not count towards the restriction.

Also, to avail the tax advantage of this plan, one must enroll for it before the end of the fiscal year or before December 31.

One of the advantages of the individual 401(k) plan is that deductibles are generally considered as business expense. Also, one has the benefit of availing tax free loans where the collateral can be the individual 401(k) account’s balance. Considering this and the fact that the plan allows for more contributions than other individual retirement solutions for self employed, individual 401(k) plans can be a lot suitable and beneficial for self employed business owners.