A personal 401k goes by many names. It is sometimes called an individual 401k, a Solo 401k, or even a self-employed 401k. It is a plan that is especially oriented to the self-employed. It works well for all owner-owned businesses, from sole proprietorships to multiple incorporated businesses.

Maximum contributions to the maximum

Its most important benefit compared to other plans is that it allows you to maximize your annual contributions. It does this in two ways. First, it will allow you to deposit up to $16,500 for 2009 salary or compensation income. If you are age 50 or older, this increases to $22,000 thanks to the “catch-up” contribution rule. Second, you can deduct a secondary amount of up to 25% of compensation income or 20% of self-employment income.

The cumulative effect of these two benefits is that you can contribute significantly more compared to a traditional 401k plan. The only limitation is that there is a cap on the total dollar amount which is currently set at $49,000 or $54,500 for those 50 and older. This means that as you earn more and more income, the advantage begins to diminish, but it still offers great contribution benefits compared to traditional plans.

Full discretion in the amount of contributions

Another advantage of a personal 401k is that you can control the amount sent each year for contributions. This means that if your business goes through some tough years, you can reduce the amount you’re giving in contributions or increase the good stuff. This is great flexibility as it allows you to have more cash on hand when the need arises.

With perks like these, all self-employed individuals should look into personal 401k plans. They offer you a great way to anticipate your future retirement with maximum contributions and flexibility in the amount of these contributions. This is great news for all freelancers.