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, C corporations, S corporations, partnerships and LLC's qualify.

How does an Individual 401k work?

The Individual 401k retirement plan consists of 2 parts: Salary Deferrals as well as 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 Both contributions are generally tax deductible and grow tax deferred until withdrawn after age 59 1/2.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 2009 the maximum Individual 401k contribution is $49,000 and $54,500 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 is $54,500. Your annual income from your business impacts the amount that can be contributed each year.

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?

You can establish an Individual 401k only if you have W-2 employees that work less than 1000 hours per year. Independent contractors employed by your business would not disqualify you from establishing this retirement plan.

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

Yes. As long as your spouse is on the payroll or receives income from the business. A spouse can work more than 1000 hours for the business and you would not be disqualified from an Individual 401k.

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. Independent contractors working for your business do not negatively impact the 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 a LLC taxed as a sole proprietorship - the deadline is the personal tax filing date of April 15 (or October 15 if an extension was filed).

S or C corporation or a LLC taxed as a corporation - the deadline 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. Roth IRAs and retirement plans that have after-tax contributions may not be rolled over unless your plan document permits after tax contributions and rollovers.

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Disclosures:

* The information on this page is for informational purposes only and does not constitute, and should not be construed as, professional, legal or tax advice. To determine your individual tax situation and specific needs, please consult a professional tax advisor.

* Information contained in these sections merely highlight some benefits. There are risks involved with all investments that could include tax penalties and risk/loss of principal.