One-Person 401(k) Plans

What is a One-Person (Solo) 401(k) Plan?

If you are self-employed, rule changes contained in the 2001 tax bill may make a one-person 401(k) plan a viable alternative, as compared to other retirement plans, for small businesses.  The solo 401(k) plan is suitable for any business owner who has no employees other than co-owners or spouses.  You may work as an independent contractor with 1099 income, freelancer, sole proprietor, or in a partnership, Limited Liability Company (LLC), or corporation.

Small business owners can establish an individual 401k and transfer their IRA, 401k, 403b, or other qualified retirement funds into the new individual plan. 

The principal reason you might want to consider a one-person 401(k) plan is it may offer higher contribution limits versus other retirement plans available for small businesses.  In this regard, the two most significant changes contained in the 2001 tax bill with respect to retirement plans were:

1) Raising the total contribution limit, including employer profit sharing and/or matching contributions, to the lesser of $53,000 or 100% of income.

2) Changing the total plan contribution limit - In 2015, employer contributions to the plan may not exceed 25% of total payroll.  The important issue here is employee contributions are excluded from this limit.

The one-person 401(k) plan includes the provision to allow age-50 catch-up contributions, provided you meet the regulation requirements (refer to Catch Up Contributions for detailed information).

Example:  If you earn up to $212,000. you can attain the maximum contribution for the 2015 plan year ($212,000 x 25% = $53,000) by making employer contributions only.  If you earn less than $212,000 you can contribute 25% of your income as the "employer", plus up to $18,000 (the maximum employee contribution) to reach the $53,000 limit.  A person 50 or older could contribute an additional $6,000 catch-up contribution, for a total of $59,000 in 2015.

In addition to the higher contribution limits, the one-person 401(k) has other advantages.  These include:

    • Low paperwork requirements.  The only annual paperwork required is the IRS 5500, which applies when the plan assets exceed $250,000.

    • The ability to take a loan.  SEP plans and Simple IRA's don't allow loans, although a profit sharing plan could.

Note:  Solo 401k plans are not covered under Title I of ERISA, meaning, they do not enjoy the same protection from creditors as do qualified plans.

The one-person 401(k) plan is a fairly new retirement tool and isn't widely offered by financial services firms.  If you would like to receive more information concerning one-person 401(k) plans, please contact Karen in Augusta at 706-724-4557, or in Columbia at 803-252-0393.

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