In its original form, the 401(k) retirement plan was only for employees of corporations. No more. Now, business owners operating as sole proprietorships, self-employed or partnerships may open a 401(k)-provided the business has no employees other than owner and spouse.

If your business falls into that category, this means you can shelter thousands more dollars per year than in other kinds of non-corporate retirement accounts.

The solo 401(k) also lets you invest in a wider range of alternatives, including real estate, and you can borrow from your 401(k) without a penalty.

"The solo 401(k) is a gift to the self-employed from Congress. This is the greatest invention since sliced bread. I'm not kidding," says Eva Rosenberg, enrolled agent, sole proprietor, and publisher of the Web site, www.TaxMama.com.

With a solo 401(k), you may participate to the same extent as someone who is a participant in a corporate-sponsored plan.

How it Works

• As an employee, (even though you are the only employee in the business) you may contribute up to 100 percent of the first $12,000 of your annual net income. As with the more familiar corporate 401(k) plans, this is a deferred-salary contribution, so you will not owe income taxes on the money you contribute until you begin making withdrawals when you retire. If you're incorporated, you must calculate your contributions on your wages, not your business's profit.

  This is a double-barreled benefit. You defer income taxes until retirement when you will probably be in a lower tax bracket, and the money in your account grows tax-deferred.

  The contribution limit increases $1,000 per year until it reaches $15,000 in 2006. Participants who are age 50 or older may contribute an additional $2,000. This amount will increase by $1,000 per year until 2006.

• As your own employer, you may contribute up to an additional 20 percent of your net self-employment income. (If your business is incorporated, you may contribute up to 25 percent of your corporate compensation.)

  Currently, the maximum total contribution allowable in a solo 401(k) is $40,000 - $42,000 if you are age 50 or older.

  If your spouse provides some services to your sole proprietorship for which you pay him or her, or if your spouse is employed by your incorporated business, each of you may open your own 401(k).

Investment Alternatives

For some participants, one of the most important benefits of the 401(k) is the expanded list of investment alternatives for money in the account. Real estate is one of the most popular 401(k) investment alternatives, and just about any form of real estate investment is permitted under the law-condominiums, single-family rentals, mobile homes, undeveloped land and second mortgages all qualify. Note, however, that neither you, your spouse, children nor parents may live on the property.

Of course, not everyone will have enough money in a 401(k) to support real estate investments. If this is your goal, you may rollover other retirement accounts, including SEP accounts, IRAs, Keoghs, even the money in other 401(k)s you had with former employers.

Other Benefits

Unlike other self-employed retirement accounts, you can borrow from the 401(k) up to 50 percent of the total value of the account, with a maximum dollar limit of $50,000. (While federal law permits this option, not all account management companies permit it.)

You must repay any loans made from your 401(k) within five years, with interest determined by the applicable federal rate. Interest payments as well as principal loan repayments must all be deposited in the account.

If you can't repay a loan from your 401(k), the IRS will treat it as an early distribution (unless you reach age 59 before the loan comes due) and you'll be assessed taxes and penalties.

Set it Up

The application for a 401(k) is relatively easy to fill out, but if you plan to take advantage of the alternative investment option, it's a good idea to work with an accountant and the company that will manage your account.

You may set up your account any time during 2004, but you don't have to fund it until tax filing time in 2005.

More Info

Additional information and a list of 401(k) retirement plan providers is at www.401khelpcenter.com. Another helpful Web site is www.pioneerfunds.com where you'll find a handy chart that will help you to estimate how much you may contribute.