If you're self-employed and you want to lower your tax bill, then opening a self-employed, or individual 401(k) plan before Dec. 31 could be smart. These "solo" 401(k) plans offer tax-savvy benefits that can significantly reduce the IRS's tax bite.

Is a solo 401(k) plan right for you? Read on to find out.

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Sorry, Uncle Sam!

Self-employed 401(k) plans work like regular employer-sponsored 401(k) plans, and that means entrepreneurs can contribute pre-tax money to them as an employee and as an employer.

The ability to "double-dip" as employer and employee gives individual 401(k) plans a big advantage over other retirement savings options, such as simplified employee pension, or SEP IRA, plans.

While solo 401(k)s allow for contributions as both worker and boss, SEP IRAs only allow contributions from an employer. The amount that can be contributed to a SEP IRA is significant (25% of net income, or $54,000, whichever is less, in 2017), but solo 401(k)s often allow you to contribute substantially more money. In 2017, 100% of compensation, up to $18,000, can be contributed to a solo 401(k) as an employee, plus another 25% can be contributed as an employer, up to a total of $54,000 in 2017.

Further, while SEP IRA plans don't allow individuals over age 50 to contribute catch-up contributions, solo 401(k) plans do. In 2017, people age 50 and up can sock away an additional $6,000 in a solo 401(k) plan.

To illustrate how much more money an entrepreneur can shelter from taxes by using an individual 401(k) plan, I used Vanguard's calculator to estimate how much money could be contributed to a SEP IRA or a solo 401(k), assuming a net business profit of $100,000.

In this scenario, someone under 50 years old could contribute a whopping $36,587.05 to a solo 401(k) plan, or only $18,587.05 in a SEP IRA. If that person is 50 or up, then an extra $6,000 can be put into the solo 401(k) plan via the catch-up contribution, too.

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What's the catch?

You can't open up a self-employed/individual/solo 401(k) plan if you have any common law employees; however, independent contractors are OK.

Solo 401(k)s can also be more expensive and complicated to open and administer than a SEP IRA. Also, an individual 401(k)'s has to be opened by Dec. 31 of the year for which your first contribution will be made, which means that entrepreneurs who are interested in setting one up for 2016 don't have much time to fill out their documents.

Other things to consider

A solo 401(k) plan has to be opened by Dec. 31 to contribute for 2016, but the actual contribution to the account can be delayed until you file your taxes in April.

Also, if you're worried that expenses and administrative burdens of a solo 401(k) might be too big of a hurdle for you to overcome, don't panic. Brokerages and mutual funds are eager to win an entrepreneur's business, and as a result, costs have fallen. Importantly, big fund families often provide help with getting these plans up and running, too. As always, if your tax situation is complex, take the time to sit down with your accountant before making any contributions.

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