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Save For Your Retirement With An Individual 401K

Hi! My name is Terry White, CEO of Sunwest Trust. Sunwest Trust provides these videos as education only. They’re not to be used as a substitution for good financial tax or legal consultation, but we want to provide this as an education.

We can give you an idea of what might be possible with your retirement account and give you an idea of what questions that you can ask those professionals to maybe make the meeting with them a little quicker. 

What Do You Need To Know About Individual 401ks?

Today, I want to talk about individual 401Ks. If you’re an individual that is in business for yourself, it can be either a sole proprietorship, an LLC, a C Corp or an S Corp, with no employees other than a spouse. You could have a spouse as an employee. If you’re one of those types of people, so maybe you’re a realtor, maybe you’re some kind of a broker of some sort. So, you’re self-employed and you have no employees other than a spouse.

Now, the employees are defined – you need to look that up to make sure that you understand – but typically it’s someone that works less than a 1,000 hours, someone under 21 years old. You also wouldn’t have to count if you have like contract people. If you have someone you know, if you’re a realtor for instance and you hire someone to go out put signs up for you and you just pay them per sign that they put up, that would be a contract. That would not be an employee.

Why An Individual 401k Out Shines A Self Directed IRA?

So, if you fit those criteria, then you could set up an Individual 401K. An Individual 401K, in my opinion, is much better than an IRA for several reasons. Number one is the contribution limits are higher. We will talk about that in a minute.

Number two is you can borrow money from your Individual 401K if you need to. The rule on that is you can borrow 50% of the asset value in the 401K not to exceed $50,000. That’s something you cannot do with your IRA. And so then there are some other rules involving real estate and that kind of stuff that also make an Individual 401K beneficial.

Individual 401k Contribution Limits

But I thought for today, I just wanted to do some research. These numbers change every year so I don’t commit them to memory. So, I looked up what the contribution limit. If you were in business in 2017 and you had a plan established by December 31st of last year and you haven’t filed your income tax yet.

Meaning you didn’t file it on April 15th you filed an extension and you have until September 15th to file your taxes, you could still make a contribution to your Individual 401K for 2017. If you were to do that the maximum contribution that you can make, the amount of money that you can defer from your salary from your business is $18,000.

If you’re over 50 years old, you get what’s called a catch-up contribution. That’s another $6,000. So, we’re talking about $24,000 that you can have deferred from your payroll as a contribution to your Individual 401K. Now, next year that’s gone up a whopping $500. So, next year for 2018, you will be able to contribute $18,500 if you’re over fifty years old and that’s another $6,000, so you’re at $24.500. That’s what you can contribute.

How To Deal With Business Contributions

Now, the next thing is the business can contribute. If you have a profitable business, it can contribute a portion of your $24,500 our salary towards your Individual 401K. And the maximum there from the IRS website, you can contribute 100% of your compensation. So, if you only made $24,000, you can contribute all of that and then the employer non-elective contributions are 25% of compensation as defined by the plan. For self-employed individuals, you need to do some research there.

But basically, the maximum that can be contributed for 2018 is $55,000. So, your $24,500 yourself and then the remaining can be contributed by the corporation, by your business, by the business that you’re employed by on your behalf. And then in 2017, if you haven’t done that yet, the limit is $54,000. So, it’s gone up a full $1,000 for 2018 from 2017.

Meet Ben

Now, some of the things that are interesting here. They give an example and I’ll just read that to you because I thought it kind of makes it more clear. Ben, aged 51, earned $50,000 in W-2 wages from his S Corp in 2018. He deferred $18,500 in regular elective deferrals. And now, because he’s 51, he added another $6,000 in catch-up contributions to the 401K plan. So, he contributed $24,500 to the plan. His business then contributed 25% of his compensation, which was the $50,000 or $12,500. So, his total contributions for 2018, in this case, were $37,500. And in that case, that was the maximum that could be contributed for Ben.

So, talk to your tax professionals, the person that does the taxes for your business and see what you can contribute. If you have a profitable business, you can contribute more than or up to the $55,000 for 2018, $54,000 for 2017.

A couple other things I just like to point out, which I think is very interesting. Other videos, I’ve said, whether you have a self-directed IRA, whether you have an Individual 401K, it doesn’t matter. I think it’s important that you start putting money away for your retirement in some form or fashion. And so, I found some information here very interesting to me.

The Phenomenon Of The Time Value Of Money

If you’re a 30-year-old and you start investing and this could be – let’s talk about it in the context of a tax-deferred or tax-free. But even if you already maxed those out and you just put additional money, this just shows you the time value of money.

A 30-year-old started investing an extra $500 a year. It could mean an extra $70,212 in retirement. I’m not sure what interest rate they calculate that with. I didn’t do the calculations to figure that out. But the idea is that the time that you have if you’re only 30 years old now, a small amount could end up being a lot of money when it’s time to retire. So, keep that in mind. Whatever you do, sit down with your tax professional, sit down with your spouse, determine how you can put some money away.

How Sunwest Trust Can Help You

If you decide to do that in a self-directed IRA or in an Individual 401K, Sunwest Trust can help you with that and we’d love to answer questions. There are many more videos on our YouTube channel, Sunwest IRA. We’re in the process of creating a podcast called Sunwest IRA, so look for that.

We’ll be putting more information about that on our videos. We put out a video every week, so please come back, subscribe to this channel, come back and watch our videos, comment. If you have comments, if you have questions, feel free to let me know. I’d love to comment on those.

Form Your Team Of Professionals To Assist You

Again, create your team with your tax professional, your accountant, your realtor, whatever you plan on investing in. With your good investment professionals, create that team and get out and do some self-directed IRA investing. For more information, check out our article on putting together your self directed IRA investment team. If you’re not going to do that, at least put money into a retirement account. Even if you just put it in a bank CD, that’s better than doing nothing. So, I look forward to talking to you again next week.

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.