The term Solo 401(k) is commonly used to refer to the Individual 401(k) also known as a Self Employed 401(k), This new self employed retirement plan is expected to revolutionize the way successful self employed business owners save for their retirement.

The Solo 401(k) takes advantage of the existing laws found under section 401(k) of the Internal Revenue Code as well as the new laws created by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) that went into effect on January 1, 2002. The Solo 401(k) is an under publicized gem in the tax law with a number of interesting features that make the Solo 401(k) unique relative to other popular self employed retirement plans like a Keogh or SEP IRA.

Eligibility

The Solo 401(k) is available to self-employed individuals and business owners with no full time W-2 employees other than themselves or a spouse. Businesses employing independent contractors (1099 employees) would not disqualify you from a Solo 401(k). Sole proprietorships, partnerships, LLCs and corporations (including both subchapter S and C corporations) would qualify.
A business that employs part-time employees W-2 may be able to exclude them from plan participation. Generally, under federal law you are permitted to exclude the following types of employees:

• Employees under age 21.
• Employees with less than one year of service.
• W-2 employees who work less than 1000 hours per year
• Certain union employees
• Certain nonresident alien employees.

Contribution Limits

In 2010 the maximum Solo 401(k) contribution limit is $49,000 or $54,500 if age 50+. Given sufficient income, a husband and wife working for the same business may contribute up to $98,000 combined or $109,000 if age 50+. Because of the way the contribution is calculated a larger contribution usually can be made into a Solo 401(k) than to a Keogh or SEP IRA at the same income level. Therefore the Solo 401(k) is usually the best option for maximizing retirement contributions and valuable tax deductions while reducing income taxes.

Solo 401(k) Loan

Another important distinction between the Solo 401(k) versus other self employed retirement plans is the ability to receive a Solo 401(k) loan. Loans are permitted up to 50% of the total value of the Solo 401(k) up to a maximum of $50,000. Solo 401(k) loans generally have a 5 year term. Principal and interest is repaid back to yourself into your Solo 401(k). A Solo 401(k) loan can be provided tax free, penalty free and without credit checks or income qualifications and the money can be used for any purpose. A Solo 401(k) loan is a key benefit and may be considered a valuable feature for many self employed business owners.

Summary

A Solo 401(k) may be well suited for the self employed business owner who would like to maximize their retirement contributions or who would like to borrow from their retirement plan using their 401(k) balance as collateral via a tax free Solo 401(k) loan.