Starting an Individual 401(k) is Easy!

This year, I set a goal (not in my actual goals, but maybe I should add it) of making regular monthly or quarterly contributions to my retirement and investment accounts. In the past, I’ve let my money sit in a saving account so that I wouldn’t have to pay taxes on earnings. I love Roth accounts, but I went a little too far and let the money sit in an extremely low interest rate savings account so that I wouldn’t have to pay taxes on my earnings.

Since I have a business (I filed as an LLC a few months ago), I am eligible for an individual 401(k). I looked at a lok options, but ultimately, I went with the individual 401(k) because of the high limits. It allows me to contribute 100% of net adjusted business profits, up to $17,000 in 2012, as a salary deferral contribution, plus an additional 20% of the net adjusted business profits for the company as a profit sharing contribution. I won’t give you specific numbers because that’s not my style, but it gives me the opportunity to contribute more than any other IRA or 401(k) option.

And since I’m young, I opened a Roth Individual 401(k). This lets me contribute after-tax money to the account. The salary deferral portion can be either Roth or Traditional (or a combination), while the profit sharing portion must be made as a traditional (pre-tax) contribution.

Once I knew what I wanted to do, I went onto Vanguard (where I do all my investing), and checked out their paperwork. There was a large packet to fill out, but most of it required basic information about me and my business. I took 30 minutes to fill it out, mailed it off, and a week later I got notification that the account had been set up for me.

I truly thought the process would take a lot longer, there would be more forms to file, and there would be some complications. My only regret is not having done this a year earlier. Instead of a silly $5,000 limit on a Roth IRA, I can contribute way more!

For any of you self-employed individuals, what type of retirement accounts do you have?

2 Responses to Starting an Individual 401(k) is Easy!

  1. Jenna, Adaptu Community Manager says:

    Great article. We have a similar one with some suggestions on Adaptu. Saving for Retirement When You’re Self-Employed: https://www.adaptu.com/articles/DOC-1634/saving-for-retirement-when-youre-self-employed

    Would love to hear your thoughts.

    • Daniel says:

      @Jenna, Adaptu Community Manager, The article does a great job of listing the different options. I think the SEP IRA is another great choice, with the only downside being that there is no Roth option for that.

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