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Individual 401(k)

A retirement savings plan adopted by a business that allows the business owner to make retirement savings contributions. This plan is sometimes referred to as an “owner-only” 401(k) plan.

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Individual 401(k) FAQs

Are there special employer reporting requirements for an Individual 401(k) plan?

No, there are no IRS filing requirements until an Individual 401(k) plan reaches $250,000 in assets, this is unless the plan is terminated. Each year when the plan reaches its $250,000 threshold, the business will need to file IRS Form 5500 and an annual information return by the end of the seventh month following plan year end.


Can any employer establish an Individual 401(k) plan?

Individual 401(k) plans are to be used only by businesses with no employees. The business may be structured as a sole proprietor, partnership, or corporation.


Does the Individual 401(k) plan limit the amount I can contribute to my IRA?

Having an Individual 401(k) plan does not affect the ability to make annual contributions to a traditional or Roth IRA. Additionally, to your Individual 401(k) plan contributions, you can make traditional or Roth IRA contributions of up to $6,000 plus an additional $1,000 catch-up contribution if you are 50 years or older. Although, participating in the Individual 401(k) plan may affect your ability to take a tax deduction for a traditional IRA contribution, but it depends on your income.


How do I establish an Individual 401(k) plan?

The employer must sign a written plan document that has been approved by the IRS to establish an individual 401(k). The IRS does not offer free Individual 401(k) plan documents, but most 401(k) service providers offer 401(k) plan documents.


How much can I contribute to an Individual 401(k) plan?

For the year 2020, you can defer up to $19,500 of your compensation into the plan, plus an additional $6,500 catch-up contribution if you are age 50 years or older.

Most Individual 401(k) plans are designed to also allow profit sharing contributions in an amount that can vary from year to year, but the max profit sharing contribution is 25% of compensation. Total deferrals and profit sharing contributions for a business owner in 2020 can reach $57,000, plus an additional $6,500 catch-up contribution if they are age 50 or older.


What are the benefits of an Individual 401(k) plan?

The benefits of an Individual 401(k) plan is that business owners can make large annual contributions. This is because there are no employees, therefore no nondiscrimination tests and employers are not required to file annual reports with the IRS until the plan reaches $250,000 in assets. Both pre-tax and Roth (after-tax) contributions are acceptable in Individual 401(k) plans.


What is an Individual 401(k) plan?

An Individual 401(k) plan is a retirement savings plan adopted by a business that allows the business owner to make retirement savings contributions. This plan is sometimes referred to as an “owner-only” 401(k) plan. This plan is designed for businesses with no employees.


What is the deadline to establish an Individual 401(k) plan?

The Individual 401(k) plan document must be signed by the last day of your tax year. For example, for a calendar-year employer, this means the document must be signed by December 31 to make contributions for that year.


When can I take money out of my Individual 401(k) plan?

The funds cannot be distributed until you reach age 59½, die, become disabled, or terminate the plan for an Individual 401(k). Although, Individual 401(k) plans can permit hardship distributions and loans.


What if I hire employees after the plan is established?

An Individual 401(k) plan is designed for owner-only businesses. If you hire employees, you must operate your plan according to the traditional 401(k) plan rules, including conducting nondiscrimination testing and filing Form 5500 annually.
 

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