Solo Opportunities: One-Person 401(k)s

An entrepreneur may be eager to take advantage of every available business opportunity. However, in order to prepare for retirement, the entrepreneur might be searching for potential options that suit their unique situation. Many small businesses offer retirement benefits through Simplified Employee Pension (SEP) plans and Savings Incentive Match Plans for Employees (SIMPLEs). These vehicles provide a straightforward plan that is inexpensive and easy to administer. However, if you are a small business owner with no employees, the one-person 401(k) may offer a suitable combination of benefits that can help you save more for retirement.

A Boost for Saving

A one-person 401(k) combines a regular 401(k) plan with a profit-sharing plan. It can only be implemented by a self-employed individual or owner of a small business with no full-time employees (an exception is made for the spouse of the small business owner). If you are a participant in a one-person 401(k), you may be eligible to make elective salary deferrals and take a business deduction for profit-sharing contributions. These contributions reduce your taxable income.

In 2021, an entrepreneur who runs a small business with no employees may elect to defer a portion of salary up to $19,500. Those aged 50 and older may make additional “catch-up” contributions of up to $6,500. In addition, the business may make a contribution up to 25% of the entrepreneur’s salary, with up to $290,000 of compensation eligible for consideration. However, the combination of salary-deferred and profit-sharing contributions may not exceed $58,000 in 2021. 

The Benefits Continue

These contribution possibilities are not unique to the one-person 401(k); any business with a regular 401(k) plan and a profit-sharing plan could achieve the same contributions on behalf of its owner/employee. However, in combining the two plans, a one-person 401(k) is simple to administer and inexpensive. In addition, because there are no other employees, a one-person 401(k) avoids nondiscrimination testing.

Depending on your circumstances, you may be able to roll a qualified plan into a one-person 401(k). Earnings have the opportunity to grow on a tax-deferred basis, and if necessary, you may take a loan subject to the limitations of your plan. Bear in mind that withdrawals made before age 59½ may be subject to a 10% Federal income tax penalty.

The one-person 401(k) offers today’s entrepreneur opportunities in preparing for retirement. The sooner you get started, the sooner you can start pursuing your retirement goals. 

Important Disclosures

This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.

This article was prepared by Liberty Publishing, Inc.

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