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Individual 401k FAQs

Is an Individual 401k Right For You? What is an i401k?

The i401k is specifically designed for small, owner-only businesses. It is a cost-effective plan that incorporates features of the typical 401(k) and profit sharing plans, but with less complexity. Under many circumstances, the i401k plan allows significantly greater tax-sheltered contributions than other types of small business retirement plans.

Appealing Features of the i401k:

  • Cost-effective administration
  • Tax-deductible contributions
  • Tax-deferred retirement growth
  • Higher plan contribution limits
  • Roth-type contributions that are after-tax, with potentially tax-free earnings
  • Access to loans
  • Flexible distribution options
  • Retirement savings consolidation through rollovers

The i401k plan is ideal for small business owners with no full-time employees, other than possibly a spouse. You may maintain an i401k plan if you receive a salary or wage from either a corporation or an unincorporated business – including sole proprietors and partnerships. i401k plans are suited for businesses that either does not employ any employees or employ only common-law employees that may be excluded from the plan coverage under federal laws. The following types of employees generally may be excluded from coverage:

  • Employees under the age of 21
  • Employees that work less than 1,000 hours annually
  • Union Employees
  • Nonresident alien employees

As a self-employed business owner, each year you are allowed to set aside a discretionary, tax-deductible “profit sharing” contribution of up to 25% of your income. You can choose not to make the contribution in any year, for any reason. Also, you are also eligible to make a pretax “salary deferral” contribution of up to $18,500 ($24,500 if you are age 50 or older). The maximum aggregate contribution you can make to an i401k plan is the lesser of 100% of participant’s compensation or $54,000 ($60,000 including catch-up contributions) for 2017 or $55,000 ($61,000 including catch-up contributions) for 2018.

An i401k plan can include a qualified Roth contribution program, which allows you to designate some or all of your deferrals as Roth after-tax contributions. They grow tax-deferred, and may be distributed to you tax-free if you meet the following requirements: (1) it must be at least five years after the first year that you made a Roth 401(k) contribution and (2) you must be age 59 ½, deceased or have become disabled.According to tax laws, you may not roll over any Roth IRA amounts into the i401(k) plan or any other tax-qualified plan.

Under federal law, business owners are permitted to take loans from Individual (k) plans regardless of whether the company is incorporated or unincorporated. Loans, therefore, can be part of the i401(k) plan program. You may take loans of up to $50,000 or 50% of the vested portion of the i401(k), whichever is less.

The Individual 401k plan is one of the least complicated retirement plans available today. Administrative costs are low because these plans are not subject to costly nondiscrimination test requirements that apply to typical 401k plans. Many business owners sponsoring i401k plans won’t have to file annual retirement plan information with the government. When your retirement plan assets accumulate to $250,000, you’ll have to file a Form 5500-EZ, which, as its name suggests, is relatively simple to complete. As long as you operate as an owner-only (and spouse) retirement plan, you’ll never have to file that complicated 5500 and accompanying schedules that most other qualified retirement plans have to file.

No, unlike IRAs, you are not required to have a custodian for your i401k. You may act as your own trustee, or you can appoint a third party trustee to administer the plan. Sunwest Trust serves as a third party trustee for Individual K plans if you would like them to do so, but you do not need a custodian or third-party trustee.

Some say it’s inevitable lawmakers will at least look at limiting the tax benefits of such plans. After all, tax deferral for 401(k)-type plans will cost the government an estimated $429 billion from 2013 through 2017. By Andrea Coombes – 401(k) Tax Breaks in Lawmakers’ Gunsights – When is the best time to set up a Solo 401k? Why not right now? Why wait until it’s too late? This may be too good to last forever. Grandfather yourself in as soon as you can. Ask a Sunwest expert if the i401k is right for you. Call 800-642-7167 for assistance.