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What you need to know about Self-Employed 401ks (Part 2)

Establishing an i401K Plan – The Step-By-Step Process of Establishing an i401k

When you set up an i401K plan, you must take specific actions. One of your first decisions will be to decide whether you will set up the plan yourself or to consult a professional or financial institution, such as a bank or trust company. There are three initial things that you will need to do to set up an i401k plan:

    • Adopt a written plan document
    • Arrange a trust fund for the plan’s assets
    • Develop a recordkeeping system

Since it can be expensive to adopt your own plan document and have it approved by the IRS, you may want to find a prototype plan sponsor who already has an IRS approved document. This is where Sunwest Trust comes into the picture. Sunwest Trust, Inc. is a prototype plan sponsor with an IRS approved plan document for a self-employed 401k. We will provide you with a written plan document, which has been approved by the IRS and has a built-in trust. This document must be amended from time to time as required by law and operating according to the terms of the document.

What is the deadline for establishing the plan?

The plan must be set up before the end of the tax year, generally December 31.

What are the contribution limits?

There are two types of contributions allowed with an Individual 401(k), a deferral limit (sometimes referred to as the 402(g) limit) and the employer contribution limit. A discussion of each limit follows.

Employer Contribution Limit

The employer contribution limit for incorporated individuals is 25% of compensation (salary), and for non-incorporated individuals (self-employed and partners), 20% of “net income from self-employment” and the dollar limit for year is $xx,xxx.

* “Net income from self-employment” is defined as “business income” (from line 12 of the 1040) reduced by that business’ share of the adjustment for one-half of self-employment tax paid (from line 27 of the 1040.)