The Individual 401(k) is sometimes referred to as a “Solo 401(k)” or “Personal 401(k)”. The Individual 401(k) is a powerful retirement savings plan for the self employed. The Individual 401{k) 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 LLCs qualify as well.
An Individual 401(k) has to be set up with a separate tax identification number. Your CPA can easily access one for you.
The Individual 401(k) plan consists of two components: salary deferrals and profit sharing contributions. Both contributions are generally tax deductible and grow tax deferred until withdrawn after 59 1/2. Withdrawals after age 59 1/2 are taxed as ordinary income. Withdrawals before age 59 1/2 may incur an IRS 10% early withdrawal penalty as well as income taxes.
Participants can elect to defer up to 100% of their eligible compensation, not to exceed the IRC402(g) limit for the specific calendar year. The 401{k) limit is a $19,500/yr for 2021 and $20,500 for 2022. Salary deferral contributions designated as Roth contributions are also included in this calculation (pre-tax and Roth deferral contributions, combined, cannot exceed the limits indicated).
In addition, participants over the age of 50 are eligible to make “catch-up” contributions to the plan. For 2021, the “catch-up” is $6,500 for a total of $26,000 in contributions and for 2022 the “catch-up” is $6,500 for a total of $27,000.
A profit sharing contribution is a contribution made by the employer.
The contribution deadline of profit sharing contributions for a sole proprietorship, partnership, or an LLC taxed as a sole proprietorship is your personal tax filing deadline plus extensions. The contribution deadline of profit sharing contributions for an S or C corporation or an LLC taxed as a corporation is the corporate tax filing deadline, plus extensions.
Employers may make a contribution to the plan not to exceed 25% (IRC 404) of the aggregate (total) eligible compensation of all eligible employees.
Yes. Both incorporated and non-incorporated businesses can deduct deferrals and profit sharing contribution. You should consult a tax professional to determine how your business should do this. Unincorporated businesses such as sole proprietors can generally deduct salary deferral and profit sharing contributions made to an Individual 401(k) Plan from personal income.
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 you complete and submit Form 5500-EZ each year. You will also have to amend your plan regularly to reflect law changes and regulatory guidance. Your tax advisor may be able to help you with details on this and other compliance requirements.
Yes. Provided your plan document has a loan provision, you may take a loan from your plan. Tax-free loans are permitted in an Individual 401(k) up to 50% of your plan balance, 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 interest) are repaid to your retirement account. Failure to make the loan payments may cause a loan default, causing taxes and IRS penalties.
Total contributions made to any participant for the year (deferral+ profit sharing) cannot exceed the IRC 415 Annual Additions Limit of $58,000 for 2021 and $61,000 for 2022, plus “catch-up” contributions totals $64,500 ($58,000+$6,500) for 2021 and $67,500 ($61,000+$6,500) in 2022.
SEP IRA 2021 $232,000 x .25 = $58,000
Individual401(k) Over age 50: $154,000x.25=$38,500 + employee contribution of $26,000 gives you a maximum contribution of $64,500.
Under age 50: $154,000x.25=$38,500 + employee contribution of $19,500 gives you a maximum contribution of $58,000.
SEP IRA 2022 $244,000 x .25 = $61,000
Individual 401(k) Over age 50: $162,000 x .25 = $40,500 + employee contribution of $27,000 gives you a maximum contribution of $67,500.
Under age 50: $162,000 x .25 = $40,500 + employee contribution of $20,500 gives you a maximum contribution of $61,000.
Calculations vary depending on whether your business is a sole proprietor, a partnership, or a corporation. You should consult with a tax advisor to assist you in determining your maximum allowable contribution as there are often other business factors that may affect the calculation. You or your tax advisor may also visit www.individualk.com for helpful information, including a calculator to help determine how much you can contribute.
• Higher contribution limits than SEP IRAs & other retirement plans
• Tax deductible contributions
• Tax deferred growth
• Contribution flexibility
• Access to tax-free loans
• Cost effective administration
• Retirement plan rollover
(Pershing Bank of New York Mellon Platform)
With out Record Keeping/Documents Only
1) $125 set up fee upon opening of the account
2) $125 annual maintenance fee
With record Keeping Services
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1) $75 Plan set up
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2) $315 Annual Service Fee
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3) $150 Additional partner or spouse
***Once the Account reaches $250K+, Form 5500-EZ will need to be filed with the IRS. Ascensus provides this at no additional cost or you may have your CPA do it at their fee.***
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• Disclosure: This information should not be considered as tax/legal advice. You should consult your tax/legal advisor regarding your own tax/legal situation.