401kIf your Maine-based small business is essentially a one-person operation, there’s an option to help you save more money for retirement: The Solo 401(k) plan.

Ordinarily, traditional defined contribution retirement plans allow annual contributions that are limited to either 25 percent of salary if you’re employed by your own S or C corporation or 20 percent of self-employment income if you operate as a sole proprietor or single member LLC.

That’s a good amount to contribute, but with a Solo 401(k) plan, you can probably make substantially larger contributions that lower your tax bill and generate more tax-deferred earnings for retirement.

A Solo 401(k) is made up of two separate parts. Together, the two parts make the plan advantageous:

  1. Elective deferral contribution—As much as 100 percent of the first $17,500 in 2014 of your salary or self-employment income can be put into a Solo 401(k) account. That amount increases to $23,000 if you are 50-years-old or older at year end.
  2. Additional employer contribution—Your employer (your company or you personally, if you are self-employed) can contribute an additional 25 percent of your salary or 20 percent of your self-employment income.

The sum of the two parts is capped at 100 percent of your annual employee compensation or self-employment income, or $52,000, whichever is smaller. The dollar cap is increased to $57,500 for people age 50 or older.

And don’t worry; a Solo 401(k) doesn’t force you to contribute more than you can comfortably afford: By making maximum contributions you can rack up major tax savings in good years, but you have the option of contributing less, or even nothing, in lean years when you need to conserve cash.

You also generally get the benefits of traditional 401(k) plans, such as the ability to borrow from your account.

Establishing and operating any 401(k) plan means some up-front paperwork and ongoing administrative effort. With the Solo 401(k), however, the administrative work is simplified, because you are usually the only participant. If you have employees, you may also have to contribute to their accounts in the same way as a regular 401(k) plan.

Ask Filler & Associates to sort out the complexities of various retirement plans and determine whether a Solo 401(k) is right for you.