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What's an individual 401(k) plan?

The individual 401(k) - also known as the solo 401(k), the solo k, or uni-k - works much the same as traditional 401(k) plans offered by large companies, as well as SEP IRAs designed for the self-employed.

Unlike other retirement plans, though, an individual 401(k) is strictly for sole proprietors who have no employees (although your spouse may contribute if he or she earns income from your business).

The individual 401(k) comes in both a traditional and Roth version, just like IRAs. With the traditional individual 401(k), you put away money on a pretax basis and it grows tax-deferred. Your money is taxed when you withdraw it, in a future that may well include higher tax rates.

If you opt for the Roth version, you put in after-tax dollars and your money grows tax-free - which means it is not taxed upon withdrawal. You can split your contributions between the two types of accounts. One other point: Unlike SEP IRAs, solo 401(k)s allow you to borrow against your savings.

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