Client: 401khoax.com
Article Number Title: 1a
“Individual 401k plans”

What is an individual 401k plan? It is a regular 401k plan combined with an employer’s profit-sharing plan. However, unlike a regular 401(k) plan, an individual 401k plan can be implemented only by self-employed individuals or small business owners who have no other full-time employees. The only exception that really applies is if your full-time employee is your spouse. In that way, the so-called employer’s profit-sharing plan really is just yours. If you have full-time employees age 21 or older or part-time employees who work more than 1,000 hours a year, you will typically have to include them in any plan you set up, so adopting an individual 401k plan will not be a viable option.

It’s important to note that an individual 401k plan no different from any other 401(k) plan. It simply takes advantage the relaxed rules that come into play when the only individuals who participate in the plan are the owner and the owner’s spouse.

What makes individual 401k plans attractive?

• Individual 401k plans are a tax-deferred retirement plans. This means you pay no tax until you withdraw money from the plan. Additionally, your business’s contribution to the plan is tax deductible. Self-employed people are built on tax deductions, so that’s key.
• Contributions to an individual 401k plan can be whatever amount you like. Always try to contribute as much as possible, but you have the option of reducing or even suspending contributions if the need arises.
• Such a plan can allow loans. Check the rules on hardship withdrawals if such is necessary.
• These plans can accept rollovers of funds from another plan for retirement savings. Such plans include IRAs, SEPs, or previous 401(k) plans.

Despite these attractive features, there are downsides.

• Like with a regular 401(k) plan, there are certain requirements you must follow under the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code (IRC). Although these requirements are simpler than for a regular 401(k) with multiple participants, you can’t escape every cost.
• Usually, using individual 401k plans like this means working with an institution that often provides limited investment choices. This may not long remain a downside, though, as using individual 401k plans goes on the rise with small business owners.
• Remember that if you have significant compensation coming in, you can already contribute a maximum $45,000 by using a traditional profit-sharing plan or SEP plan. Your new plan won’t allow you to exceed this limit, except with catch-up contributions by those at least age 50.
• Remember that while the plan works now, it may not meet your future needs. Let’s say your business grows and you hire someone else besides your spouse. That employee needs to be included in your plan. At that point, you have to cast aside the benefits of the individual plan and bring in a full 401k plan anyway.

Remember to weigh all the options when deciding about your individual 401k plans. Talk to an accountant and get absolutely all the facts in hand before making this decision. Individual 401k plans are definitely worth it if all the pieces look like you can put them in place.