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Monday, September 20, 2004

Solo 401(k)s

A blog from the maker of Swoosh recently had a post about 401(k)s for sole proprietorships. While this sounds like a reasonable plan, there are several caveats.

The first is this should probably only be done after one's IRA has been maxed out. First the article states that it would cost several hundred dollars to set up, an IRA is essentially free. Secondly, a regular IRA would be functionally equivalent to a solo 401(k). Finally, if one is just starting there business and their income is below $13,000 the tax benefits of a 401(k) are dubious at best. Probably less than half of that $13,000 would be taxable and even that half would be at the lowest minimum rate of 15%. It is much more likely that the tax rate for the entreprenuer will be much considerably higher later in life when their business is mature and they have a higher stadandard of living. Therefore a Roth IRA would be the best bet for this proprieter. If this had been already maxed out, a solo 401(k) might not be a bad idea for long term savings.

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