A 401(k) Just for You

By Sharon Epperson

Roger Howard, a Charlotte, N.C., service maintenance manager, had worked for the same firm for 23 years and steadily contributed to his company's 401(k) plan. When he started his own business this summer, he wondered how he could continue to stash away significant retirement savings. Howard discovered that he could set up his own 401(k)--a Solo 401(k), also called the single-owner 401(k)--enabling him to put away more money than almost any other retirement plan available to the self-employed.

With the stock market picking up steam, many workers might want to put more of their income into a retirement savings plan. The Solo 401(k), a little-known perk that came out of the 2001 tax-law changes, lets you sock away as much as $42,000 this year.

Employees who participate in their employers' 401(k) plans this year can contribute just $12,000 pretax, plus an additional $2,000 in "catch-up" contributions if they're 50 or older. Another popular plan for small-business owners, the SEP-IRA, allows you to make a tax-deductible contribution of up to 25% of the income you receive from your business, with a cap of $40,000. The Solo 401(k) lets you defer up to $12,000 of pretax income and make a tax-deductible contribution of a maximum of 25% of your total income, for a combined $40,000 (or $42,000, including the $2,000 catch-up contribution for those 50 or older). Compare your potential savings with both plans using the calculator at 401khelpcenter.com

Investment adviser Judson Gee of JHG Financial Advisers in Charlotte says anyone who has his own business and no full-time employees should consider the Solo 401(k). His advice: "They can start by salarying themselves with $12,000 and take the entire sum pretax and put that into the plan." Even if you participate in your employer's 401(k), you can contribute money from a sideline business to a Solo 401(k), says Scudder Investments' Susan Hartnett. The downside is that if your business expands and you add employees, you will have to open another kind of plan.

Until then your Solo 401(k) assets can accumulate quickly, since you can roll over any other tax-deferred retirement savings. You can also borrow against it, taking out a loan for half the balance or $50,000, whichever is less. With a SEP-IRA, you may incur a 10% penalty and have to pay income tax if you take money out before age 59 1/2.

Howard says if he has to borrow money for his business, he would take it from his Solo 401(k). He can take up to five years to repay the loan and pay interest to his Solo 401(k) account, not a bank--another bonus for the small-business owner's hard-earned bucks.

Sharon Epperson is the personal-finance correspondent at CNBC