401k Rollover Answers

If you are self employed, the US government has made a retirement provision just for you. You can open and maintain a 401(k) retirement account just as if you worked for a company. However, there are some factors to weigh before you decide to open an individual 401(k) account. Let’s look at the pros and cons.

One of the first pros is that you can choose to fund the account with pre-tax dollars – like a traditional 401(k) or IRA — or you can choose to fund it with post-tax dollars – like a Roth IRA.  Second, although it is a risky move, you could borrow against the solo 401(k) which is something you can’t do with a SEP IRA.  The third pro is the best one, in my opinion. The solo 401(k) has a provision that allows you to contribute significantly more money to the account than a traditional fund. In essence you are both the employee and the employer to the government. The current maximum for individual 401(k) accounts is $46,000 per year.

There are a few items in our con list. First, your choices when it comes to funds are pretty limited. The paperwork is a bit more burdensome than with regular 401(k)s, IRAs ,and Roths so not every brokerage house is going to be equipped to handle one for you. If you look to the big guys, however, like Schwab, you’ll find that they can deal with the solo k for you.

This leads me to con number two – fees. The fees associated with solo 401(k) accounts tend to be higher. This might not be a deal breaker, but you need to be aware so that you can make a truly informed decision about which retirement plan is best for you.

As with any 401(k), you can decide to close it out before you reach the age of 59 and a half. Doing that gives you the penalties you’d expect: the tax hit and the additional 10% fee.  When you finish tabulating it all, you’ll find that you’ll probably be getting about 60% of what you actually withdrew from the account. When you look at it that way — $10,000 becomes $6,000 – do you really need the money that much? Perhaps you could consider a traditional loan instead of throttling your retirement.

Overall, if you are self employed, why wouldn’t you choose to set up an individual 401(k) account? The pros far outweigh the cons. You have the flexibility to choose between pre and post-tax dollars and you get to contribute a ton more money than people who work for someone else. Do yourself a favor, do your future self a favor, and get a retirement fund started today.