The One-Person 401k Plan
by Ken Morris
Did you know that a firm as small as one-person can establish a
401(k)? This is not a new phenomenon. It just never made sense
under the old tax law. However, recent changes have made the
401(k) much more attractive for small employers.
How attractive? Consider a sole proprietor at age 50, with
Schedule C income of $40,000. Assume this business owner would
like to contribute as much as possible to a tax-deferred
retirement plan during 2005. By adopting a SEP IRA plan or a
Profit Sharing Plan, the owner may contribute a maximum of
$7,434. By adopting a Simple IRA plan, the owner may contribute
a maximum of $13,108. However, by adopting a 401(k) plan, the
owner may contribute up to $25,434 for 2005.
As you can see, the one-person 401(k) plan offers you, the small
business owner, the opportunity to make a much larger
contribution to your tax-deferred retirement plan. This strategy
even works well for small businesses with certain non-owner
employees. Since the contribution amount is entirely
discretionary each year this savings strategy is very flexible.
Furthermore, contributions are tax-deductible and grow
tax-deferred to make this savings strategy very effective.
Additional incentives found in the new tax relief act add to the
attractiveness of the one-person 401(k) plan. For example, the
new tax relief act permits you, the business owner, with the
ability to take a loan from your one-person 401(k) plan. Loans
are now available to shareholders, partners, and
sole-proprietors on a tax and penalty-free basis as long as the
loan amount does not exceed the lesser of 50 percent of the
account balance or $50,000.
Finally, there is no IRS Form 5500 filing expense associated
with the initial years of your one-person 401(k) plan. You may
not be required to file an IRS Form 5500 for your one-person
401(k) plan until the assets in your plan exceed $100,000 or a
non-owner employee qualifies for the plan. So, any initial
administrative expenses will be minimal.
The one-person 401(k) plan savings strategy is most suitable for
firms employing only owners (shareholders, partners, and
sole-proprietors) and their spouses. An experienced financial
advisor, an ERISA attorney, or a retirement plan administration
firm can analyze the suitability of this strategy for your firm.
About the author:
"Can somebody please help me watch, manage, invest or oversee my
401k" is the question Mr. Morris hears most often that causes
him the most concern. Fearing the American worker is being left
in the dark, Mr. Morris, a fee based Investment Advisor
Representative, based in Central Ohio, with Raymond James
Financial Services, Inc., helps 401k participants get the
most out of their retirement.