401k plans can be established by self-employed entrepreneurs. These small business owners, however, must have no other full-time employees than themselves and their spouses. There are rules that apply once other employees come on the scene—specifically, an SBO in that situation finds himself or herself to be a boss and not just an entrepreneur. That means that the boss needs to provide the appropriate retirement for all employees, making it so that the plan is no longer individual.

Individual 401k plans are easier to administer, because of the lack of employees and the kindness shown to small business owners by tax law, than other types of defined contribution retirement plans. Your individual 401k plan will not require non-discrimination testing procedures and regulations, since it only involves you and posibly your spouse. This is made possible by a particular Act of Congress known as the Economic Growth and Tax Relief Reconciliation Act of 2001 (2001 Tax Act).

However, the Act expires in 2010. so you had better start pressuring your local representative or senator to make sure it extends. If the Act is not extended, you’ll find yourself up the creek without a paddle—but, if you start right now, you finding yourself without a paddle won’t be too bad since you’ll have already amassed enough cash on the side through your individual 401k plan to sit comfortably while you figure out the new rules. Even when the Act expires, individual 401k plans are still 401k plans, whether solo or not, so they’ll maintain the regular 401k benefits.

The downside to individual 401k plans is, obviously, the cost to establish them. Once you have it up and running, you’ll run into administration costs and restricted investment options. And, of course, if you ever bring other employees in, you lose the solo 401k benefits and have to go back to the normal regulations.

What makes individual 401k plans unique is in comparison to other solo retirement plans, greater contributions may be made at the same income levels. This maximizes retirement contributions and tax deductions. As of 2009, individual 401k contribution limits are $49,000 a year ($54,500 if at least 50 years of age). Also, an Individual 401k allows the flexibility to borrow against the value of your 401k. Tax free loans of up to 50% of the total 401k value, with a $50,000 maximum—a standard 401k rule—are permitted in an individual 401k plan. This is not just a unique aspect of a solo 401k; it is a highly attractive reason to set one up. Let’s consider a scenario of a solo 401k to see just how big a deal this is.

Let’s say we have a man named Bill, 42 years old, the sole owner of an incorporated business. In 2009, let’s say he made $85,000. Bill has gone ahead and already set up a 401(k) plan for his retirement. In that way, when Bill makes his contribution of $49,000 to his individual 401k plan, it comes off the top as a tax-deductible expense and defers that income until such a time as he is desperately in need of it. Even if Bill can’t set aside the full amount that year, he can set some aside, which still leaves him sitting pretty in his use of individual 401k plans.