If you are a self-employed business owner, an i401(k) may be just the right retirement option for you. The i401(k) or Individual (k) gives self-employed business owners the same great retirement benefits that large corporations have enjoyed for years. The i401(k) is significantly less complex than a typical 401(k) or other profit sharing plans and in many cases, it allows for much greater tax-sheltered contributions than other traditional types of small business retirement plans.
There are many advantages to having an i401(k) over other small business retirement plans, such as SEPs and SIMPLES. First, the contribution limits can be much higher. As the self-employed business owner, you can set aside up to 25% of your income as a tax-deductible, profit sharing contribution. You can also contribute up to $16,500 for 2011 ($22,000 if you are age 50 or older) as a salary deferral. The maximum contribution for an i401(k) plan for 2011 is the lesser of $49,000 ($54,500 if age 50 or older), or 100 percent of compensation.
Another advantage to the i401(k) is the Roth contributions that you are eligible to make. You can designate some or all of your deferrals as Roth contributions. Roth contributions are after-tax dollars, so those contributions will grow tax-free.
Unlike an IRA, you may take loans from your i401(k). Make sure to check with your tax professional to find out the limitations and amounts that you can borrow from your i401(k) plan.
To be eligible to have an i401(k), you must be a self-employed business owner with no full-time employees other than your spouse. Employees that work less than 1,000 hours annually, employees under the age of 21, Union employees and Nonresident alien employees are generally excluded from coverage under your company’s i401(k) plan.
Last, the i401(k) is very low in administrative costs. Unlike an IRA, you do not need to have a custodian for your i401(k), you may act as trustee for your own plan. You simply open a checking or savings account in the name of your i401(k) plan trust and work with your tax professional to determine how much you can contribute each year. You may also choose to not contribute in any year, for any reason. The i401(k) gives you complete flexibility to contribute when you would want. Once your account accumulates $250,000 you’ll have to start filing a Form 5500-EZ, which your tax professional should be able to help you prepare.
It’s just that simple. If you have any additional questions about i401(k) plans, feel free to call Sunwest Trust and one of our knowledgeable customer service representatives will be happy to assist you or you can also read our i401k FAQ’s.