Individual 401k Plans: Pros and Cons
If you are self employed, you don’t have to miss out on the great benefits of government sponsored retirement savings plans. There is an individual 401k option for self employed people. It is true that there are pros and cons to the individual 401k, or solo K option.
Flexibility is the first and best of the pros for opening a solo 401k. This is flexibility with what kind of dollars fund your account. You can choose to use pre-tax dollars, as with a traditional IRA or you can do the post-tax dollar route as with a Roth IRA. Another mark in the plus column is that you can borrow against your individual 401k, as you would with a company sponsored 401k account. Lastly, you can contribute significantly more to a solo k. The current level for individual 401k accounts is $46,000 per year. That might seem like a staggering figure to you. You might be shocked at the idea of socking that much money away for retirement each year.
The question you have to ask yourself is this: how much money do you need for retirement? What kind of lifestyle do you want in your golden years? Everyone has a different idea and dollar figure in their head, and another good question is to ask if that dollar figure is based on any sort of reality. Do you really know how much money you’ll need for retirement?
Of course there would be a down side to the idea of contributing to an individual 401k. As with so much about being your own boss, there is more paperwork involved in this type of account, compared to employer sponsored 401ks. More paperwork means that not every brokerage firm is going to have the ability to be your firm. Larger houses like Vanguard will have the means to handle your account. Larger houses, however, mean larger fees. In reality, the higher fees are due to the fact that you are negotiating solo for the fees on the account. With a traditional 401k account, your company, or maybe a group of companies, negotiates with the brokerage firm for low fees for the account. A large group with millions of dollars in the firm can command a better fee structure than you, with your 5 or 6 figure account.
Looking at the pros and cons helps. It is important to go into every transaction with eyes wide open. Don’t let the cons steer you away from the idea of opening an individual 401k, however. The benefits far outweigh the drawbacks. The truly important thing is that you are saving for retirement and making smart financial choices.
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