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Self-employed professionals can create a self-contained 401(k) plan, allowing for higher contribution limits and flexibility in determining how much to contribute each year. The process for establishing this type of retirement plan is simple, and loans can be taken out in crisis situations.
As more people choose to make a living as a freelancer, alternatives to employer-sponsored retirement and investment plans have been developed. Since 2001, this growing sector of the workforce has been able to create a self-contained 401(k) plan. Serving as a means to build a nest for the future, the 410(k) plan only offers all the advantages of group plans, plus a few other incentives.
Standalone 401(k) plans are characterized by allowing higher contribution limits than those found in many employer-sponsored retirement plans. This feature of the self-employment 401(k) plan allows the self-employed professional to divert additional funds directly into the plan, rapidly increasing the retirement fund in times of prosperity.
At the same time, the self-employment 410(k) plan allows the individual to determine how much or how much to contribute in a given calendar year. This can be important for people who work as independent contractors, as the income generated from work projects ranges from plentiful to minimal over the course of the year. Therefore, it is possible to contribute less to the 401(k) plan on your own during years that are somewhat financially tight, and divert large amounts of funds to the plan during periods when income far exceeds expenses.
One of the best things about a stand-alone 401(k) is that the process for establishing this type of retirement plan is very simple. Administrative requirements are simplified so it takes very little time to run the fund. Many providers of a stand-alone 401(k) plan also provide online access, making the process of adding funds and tracking the current status of assets an easy process.
Like many retirement plans, it is possible to raise funds in a crisis situation by exercising the loan option that is part of the stand-alone 401(k) plan. In general, there are some limits on the amount of the loan. Most plans require that the loan be less than half of the checking account balance, or below a fixed amount specified in the plan contract. Loans made against the plan carry no penalties or interest, as long as the loan is repaid according to the terms. However, stiff interest rates or significant penalties may be incurred if the loan is not paid on time.
SmartAsset.
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