Individual 401k

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.

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