One Person 401(k) Plans

Winter, 2009

The Economic Growth and Tax Relief Reconciliation Act of 2001 allowed the small business owner to make a larger tax deferral and tax deductible contribution to a retirement plan through a solo 401(k) versus the traditional IRAs or SEP accounts.

The solo 401(k), also known as the uni-401(k), one man 401(k) and the mini-401(k) plan is not subject to coverage testing and nondiscrimination rules necessary for the typical 401(k) plan because there is only one person involved, and that is the business owner.

The traditional retirement plans and SEPs limit the annual contribution to 20% of self employment income net of the 50% self employment tax liability, or 25% of owner’s compensation to a maximum of $49,000.

The solo 401(k) allows two different contributions, the elective deferral of up to $16,500, $22,000 if age 50 or older, and the employer contribution (see paragraph 3 above), with a cap of $49,000 for the deferral plus employer contribution, $54,500 if age 50 or older.

The following compares various retirement plans at various profit amounts for an unincorporated, self-employed business owner, under age 50:

For those owners age 50 and over, add an additional $2,500 for each amount shown under Simple IRA and $5,500 for each amount shown under 401(k) column.

These plans can be used for incorporated and unincorporated businesses, including C corporations, S corporations, single member LLCs, and sole proprietorships. Real estate brokers, consultants, attorneys, manufacturing representatives, retirees starting a new business and other professionals who work by themselves are prime candidates.

These plans must be set up by December 31, except the SEP/IRA which is April 15, to take advantage of the current years deferral and tax deductible contribution. Give us a call if you have any questions or if we can be of any assistance.