Individual 401k FAQs

What is an Individual 401k?

The Individual 401k is sometimes referred to as a "Solo 401k", "Single(k)", “Uni-k”, “Personal 401k” or "Self Employed 401k".

The Individual 401k is a powerful retirement savings plan for the self employed. This plan is available due to the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) that went into effect on January 1, 2002. The Individual 401k is for owner-only businesses or owner and spouse businesses. The business can be incorporated or unincorporated. Sole proprietors, S corporations, C corporations, partnerships and LLCs qualify.

How does an Individual 401k work?

The Individual 401k retirement plan consists of 2 parts, a salary deferral and a profit sharing contribution. Both contributions are generally tax deductible and grow tax deferred until withdrawn after age 59 1/2. Withdrawals after age 59 1/2 are taxed as ordinary income. Withdrawals prior to age 59 1/2 may incur an IRS 10% premature withdrawal penalty as well as income taxes.

How much can I save in an Individual 401k?

In 2012 the maximum Individual 401k contribution limit is $50,000 and $55,500 if you are age 50+. If you are age 50+ an additional $5,500 of salary deferral, referred to as a "Catch-up" contribution, is permitted so the maximum contribution limits is increased from $50,000 to $55,500. The 2011 contribution limit is $49,000 and $54,500 if age 50+.

Are contributions to an Individual 401k tax deductible?

Incorporated businesses can generally deduct the salary deferral contribution from W-2 earnings and the profit sharing contribution as a business expense.

Unincorporated businesses such as sole proprietors can generally deduct salary deferral and profit sharing contributions made to an individual 401k from personal income.

Can I establish an Individual 401k if my business has employees?

In order to qualify for an Individual 401k a business owner can not employ salaried, W-2 employees who work more than 1,000 hours in a calendar year. Business owners and their spouse do not apply to this 1,000 hour threshold. Also, a business owner can hire independent contractors who work more than 1,000 hours in a calendar year and it will not impact eligibility for an Individual 401k. 

Can my spouse who works with me also contribute to the Individual 401k?

Yes, however in general the spouse would need to be on the payroll and receive a W-2 salary.

What happens to my Individual 401k if I hire full-time employees?

If you anticipate hiring W-2 employees with more than 1000 hours of service in a calendar year in the future, then an Individual 401k may not be the appropriate retirement plan for you. A business owner can hire independent contractors who work more than 1,000 hours in a calendar year and it will not impact eligibility for an Individual 401k.  Speak with a BCM financial advisor to learn more about your retirement options.

What is the deadline for establishing an Individual 401k?

The deadline for establishing an Individual 401k is December 31st of the year in which you would like to receive the tax deduction or fiscal year end for corporations.

Can I borrow against the Individual 401k assets?

Yes. Provided the plan document has a loan provision so you are permitted to have a loan. Tax free loans are permitted in an Individual 401k up to 50% of the total 401k value up to a maximum of $50,000. The loan is repaid according to the loan amortization schedule that is provided when the loan is initiated. The loan payments (including the interest) are repaid back to your retirement account. Failure to make the loan payments may cause a loan default causing taxes and IRS penalties.

Questions and answers about an Individual 401k loan.

Is there a deadline to make salary deferrals into the Individual 401k?

Sole proprietorship, partnership or a LLC taxed as a sole proprietorship - the deadline for depositing salary deferrals into the Individual 401k is generally the personal tax filing deadline April 15 (or October 15 if an extension was filed).

S or C corporation or a LLC taxed as a corporation - salary deferrals must be made into your Individual 401k within 15 days of the period in which you are paying yourself. For 401(k) contributions made at the end of a calendar year, they need to be deposited by January 15 at the latest.

When must profit sharing contributions be made into the Individual 401k?

Sole proprietorship, partnership or an LLC taxed as a sole proprietorship - the deadline to fund the profit sharing contribution is the personal tax filing date of April 15 (or October 15 if an extension was filed).

S or C corporation or an LLC taxed as a corporation - the deadline to fund the profit sharing contribution is the corporate tax filing deadline March 15, plus extensions.

What are my responsibilities to properly maintain my Individual 401k?

You are responsible for submitting the salary deferral and profit sharing contributions by their required deadlines. If you have a loan, you are required to make the loan repayments according to the terms of the loan amortization schedule or risk a loan default. When the total assets in your plan reach $250,000, the IRS requires that IRS Form 5500 is completed and submitted to them annually.

Can I roll my other retirement plans into an Individual 401k?

Yes. An important feature of the Individual 401k plan is the opportunity to consolidate retirement assets into one account. This includes Traditional IRAs, SEP Plans, 401k Plans, Money Purchase Plans, Profit Sharing Plans, Keogh plans, Defined Benefit Plans, 403b Plans and Rollover IRAs. A Roth 401k from a previous employer may be eligible to be rolled over into an Individual Roth 401k provided the 401k plan document permits Roth 401k contributions and rollovers. Roth IRAs can’t be rolled over into an Individual Roth 401k.