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Individual 401(k)s Part 4

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For purposes of this section, the term “disqualified person” means a person who is—

(A) a fiduciary;

(B) a person providing services to the plan;

(C) an employer any of whose employees are covered by the plan;

(D) an employee organization any of whose members are covered by the plan;

(E) an owner, direct or indirect, of 50 percent or more of—

(i) the combined voting power of all classes of stock entitled to vote or the total value of shares of all classes of stock of a corporation,

(ii) the capital interest or the profits interest of a partnership, or

(iii) the beneficial interest of a trust or unincorporated enterprise,

which is an employer or an employee organization described in subparagraph (C) or (D);

(F) a member of the family (as defined in paragraph (6)) of any individual described in subparagraph (A), (B), (C), or (E);

(G) a corporation, partnership, or trust or estate of which (or in which) 50 percent or more of—

(i) the combined voting power of all classes of stock entitled to vote or the total value of shares of all classes of stock of such corporation,

(ii) the capital interest or profits interest of such partnership, or

(iii) the beneficial interest of such trust or estate,

is owned directly or indirectly, or held by persons described in subparagraph (A), (B), (C), (D), or (E);

(H) an officer, director (or an individual having powers or responsibilities similar to those of officers or directors), a 10 percent or more shareholder, or a highly compensated employee (earning 10 percent or more of the yearly wages of an employer) of a person described in subparagraph (C), (D), (E), or (G); or

(I) a 10 percent or more (in capital or profits) partner or joint venturer of a person described in subparagraph (C), (D), (E), or (G).

If you have questions about whether or not a specific transaction would be considered a prohibited transaction, we strongly urge you to speak with a CPA or tax attorney.

Are all contributions made on a pretax basis?

A self-employed 401(k) plan can include a qualified Roth contribution program, which allows you to designate some or all of your deferrals as Roth after-tax contributions. The earnings grow tax-deferred, and may be distributed tax free if you meet certain distribution requirements.

Unlike Roth IRA contribution eligibility, designated Roth contribution eligibility is not subject to income limits. So, like many business owners, if you do not qualify for Roth IRA contributions, a self-employed 401(k) plan with a Roth contribution feature might be a wise choice.

Am I able to take a loan from a self-employed 401(k) plan?

Under federal law, business owners are permitted to take loans from self-employed 401(k) plans regardless of whether the business is incorporated or unincorporated. Loans, therefore, can be part of the plan program.

Loans may be taken in the amount of 50% of the vested portion of the 401(k) or $50,000, whichever is less.

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Terry White

About Terry White

I started my business career after getting my degree in Accounting from the University of New Mexico in 1983. My first job was as a controller for a local title company, and in 1987 I started First Financial Escrow, Inc. Over the years I played a part in several startup companies including First Financial Equities, Inc., First Financial Trust, Inc., First Financial Marketing, Inc. and Asset Ventures, Inc. In 1997 First Financial Escrow, Inc. was able to purchase the escrow accounts from Sunwest Bank and changed its name to Sunwest Escrow. As the market changes, Sunwest has grown and changed along with it. Besides my wife, Sheila, we have three boys, two daughters-in-law, one grandson, another grandson on the way and a future daughter-in-law. Sunwest is my passion, and I enjoy coming to work every day to see what will happen next. I enjoy fly fishing, spending time in Colorado, biking and watching my boys play soccer.