SBO 401(k) Definition [Video]

A SBO 401(k) is a tax-deferred, government-registered retirement savings plan that is specially designed for small business owners (SBOs). Eligible participants for a SBO 401(k) are businesses that employ the business’s owners and their spouses. The business must not have any other eligible employees. It is also known as an independent 401(k).

A SBO 401(k) provides self-employed small business owners the opportunity to participate in a tax-deferred retirement savings plan. These types of savings plans may be either self-directed or professionally managed.

As with standard 401(k) plans, the contribution limit for 2023 is $22,500 (increasing to $23,000 in 2024). Additionally, catch-up contributions of up to $7,500 in both 2023 and 2024 are allowed for those age 50 and over. Contributions made to the 401(k) are tax deductible.

The SBO 401(k) offers many of the same features as a SEP IRA, but an independent 401(k) can be cheaper to establish and …