BACKNEXT

What is an Individual 401(k)?

The Individual 401(k) is an especially good choice if you are scrambling to build up your retirement savings and can afford to sock away a considerable portion of your earnings. The generous contribution formula lets you put aside more money at a lower income level than you can with a SEP IRA.

As an employee, you can stash away as much as $16,500. As the boss, you can contribute an additional 25% of compensation, up to a maximum of $49,000, including your employee contribution. These contributions are discretionary, so you can save the maximum in flush years and nothing in tougher times.

If you and your spouse are both in the plan and enjoy a banner year, you could save a total of $98,000. And if you are both 50 or older and eligible for catch-up contributions of $5,500 each, the total climbs to $109,000.

It's also possible to take out a loan against an individual 401(k). That can be useful if you need funds during a business crunch. You can borrow half the account's balance, up to $50,000, and typically take up to five years to pay it back (provider rules vary). That said, borrowing from a retirement plan should be a last resort, since it could seriously undermine your long-term goals.

Individual 401(k)s come with a bit of bureaucratic hassle. Once your balance exceeds a certain level - $250,000 in 2010 - you have to fill out an IRS form (form 5500) every year, which adds a bit to your accountant's bill.

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.