Individual 401k

The Individual 401k is a self employed retirement plan that is sometimes referred to as an "Individual(k)", "Solo 401k", "Single(k)" and "Self Employed 401k".

What is an Individual 401k?

The Individual 401k is the newest and most exciting retirement plan to benefit the self employed, thanks to the recent tax law created by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). This tax law became effective beginning January 1, 2002 and provides significant advantages to small businesses whose only employee is the owner or the owner and their spouse. These self employed business owners can establish an Individual 401k plan and take advantage of this powerful retirement savings tool.

What makes the Individual 401k unique is that compared to other self employed retirement plans greater contributions may be made at identical income levels, therefore maximizing retirement contributions and valuable tax deductions. The 2015 Individual 401k contribution limits are $53,000 and $59,000 if age 50 or older (2014 limits are $52,000 and $57,500 if age 50 or older).

Also, an Individual 401k allows the flexibility to borrow against the value of your 401k. Tax free loans (up to 50% of the total 401k value with a $50,000 maximum) are permitted in an Individual 401k plan.

Self employed business owners may be well suited for an Individual 401k if their objective is to maximize their retirement contributions or if they would like to borrow from their retirement plan using their 401k balance as collateral via a tax free Individual 401k loan.

The Individual 401k plan has several benefits for small business owners and the self employed.

  • Higher Contribution Limits
  • Roth Individual 401k
  • Tax Deductible Contributions
  • Tax Deferred Growth
  • Contribution Flexibility
  • Access to Tax Free Loans
  • Cost Effective Administration
  • Retirement Plan Consolidation

Higher Contribution Limits

Compared to other retirement plans you may be able to make greater contributions at identical income levels, therefore maximizing retirement contributions and valuable tax deductions.

Individual 401k contribution limits are $52,000 in 2014 or $53,000 in 2015 ($57,500 in 2014 or $59,000 in 2015 if age 50 or older). The annual Individual 401k contribution consists of 2 parts a salary deferral contribution and a profit sharing contribution. The total allowable contribution adds these 2 parts together to get to the maximum Individual 401k contribution limit.

Learn more about Individual 401k Contribution Limits.

Roth Individual 401k

Individual 401k salary deferral contributions can be made as Roth 401k (after tax) or Traditional 401k (pre-tax). The basic difference between a Roth 401k and a Traditional 401k is that the Roth 401k is funded with after-tax contributions while the Traditional 401k is funded with pre-tax contributions. In other words, with a Roth 401k you pay taxes today in return for a tax-free withdrawals in retirement. Traditional 401k contributions are tax deductible and are made pre-tax so you save taxes today, but withdrawals are taxed in retirement.

Learn more about a Roth Individual 401k.

Tax Deductible Contributions

Individual 401k retirement plans may provide significant tax savings because in general, you can deduct 100% of contributions made into an individual 401k from your taxable income. Incorporated businesses can generally deduct the salary deferral contribution from W-2 earnings and the profit sharing contribution as a business expense. Unincorporated businesses such as sole proprietors can generally deduct contributions made to an individual 401k from personal income.

Tax Deferred Growth of Investment Earnings

Assets in an Individual 401k grow tax-deferred, meaning you won't pay taxes on the dividends and investment earnings until you withdraw the assets. Tax deferred earnings growth can have a powerful effect over time. Money can be withdrawn after age 59 ½ without penalty. When money is withdrawn after age 59 ½ income taxes will be paid only on the amount that is withdrawn and the remaining balance in the Individual 401k continues to go tax deferred. If you should withdraw money prior to age 59 ½ you will pay income taxes and it's likely that you will incur an additional 10% IRS penalty for a premature withdrawal.

For some self employed investors, saving in a tax advantaged retirement plan such as an Individual 401k provides a significant benefit. Investors are able to make tax deductible contributions during their working years and are able to earn many years of tax deferred growth on the dividends and investment earnings. Once retired and potentially in a lower tax bracket, you can withdraw the money as needed from your Individual 401k.

Contribution Flexibility

Each year the funding of your individual 401k retirement plan is completely discretionary. You can increase or decrease your salary deferral and/or profit sharing contributions depending on the profitability of your business.

Access to Tax Free Loans

An Individual 401k loan is permitted at any time using the accumulated balance of the 401k as collateral for the loan. Individual loans are permitted up to 1/2 of the total balance of the 401k up to a maximum of $50,000. A loan from an Individual 401k is received tax free and penalty free. There are no penalties or taxes due provided loan payments are paid on time.

Generally, Individual 401k loans have a 5 year maximum repayment term. Individual 401k loans used for the purchase of a primary residence may extend the loan repayment term up to 10-15 years. Loans must be repaid according to the terms of the loan amortization schedule which is provided when a loan is initiated. Failure to repay the loan according to these terms may result in a loan default causing taxes as well as IRS penalties. Loans are not permitted with Traditional or Roth IRAs, SEP IRAs, or Keogh (Money Purchase/Profit Sharing Plans).

Loan payments are made monthly or quarterly. Loan payments of principal and interest are repaid back into your own Individual 401k. Because of this an Individual 401k loan may be a favorable option compared to other loans where interest is paid to the bank or lending institution.

The proceeds from an Individual 401k loan can be used for any purpose and there are no income or credit qualifications to receive the loan. The ease of an Individual 401k loan is attractive because start up businesses and self employed business owners often run into difficulties with qualifying for a self employed loan through banks and lending institutions.

Learn more about an Individual 401k loan.

Cost Effective Administration

Compared to traditional 401ks, the Individual 401k plan is easy, flexible and inexpensive to maintain because administration is minimal, and complex discrimination tests are not required. Fees vary depending on the level of administrative services provided by the Individual 401k administrator. Loans may have an additional administrative fee. If an Individual 401k is greater than $250,000 IRS form 5500 needs to be filed and the administrator may charge a fee for its completion or you could elect to complete the form yourself.

Retirement Plan Consolidation

An important feature of the Individual 401k plan is the opportunity to consolidate retirement assets into one account. This includes Traditional IRAs, SEP IRA Plans, 401k Plans, Money Purchase Plans, SIMPLE IRAs, Profit Sharing Plans, Defined Benefit Plans, 403b Plans and IRA Rollovers. Consolidating retirement accounts is particularly important if you would like to use the loan provision. Other advantages of rolling over and consolidating your retirement plans into your individual 401k are improved financial organization and ease of monitoring your retirement portfolio.

Individual 401k Eligibility

The Individual 401k is available to self-employed individuals or business owners with no employees other than a spouse. Sole proprietorships, partnerships and corporations (including both subchapter S and C corporations) would qualify.

A business that employs part-time W-2 employees may be able to exclude them from plan participation. Independent contractors (1099 employees) employed by your business are excluded from the plan and would not disqualify you from having an Individual 401k. Generally, under federal law you are permitted to exclude the following types of employees:

  • Employees under age 21.
  • Employees with less than one year of service.
  • W-2 employees who work less than 1000 hours per year.
  • Certain union employees.
  • Certain nonresident alien employees.

[ Individual 401k FAQ ]


Beacon Capital Management Advisors provides retirement plans to the self employed, freelancers, entrepreneurs, independent contractors and small business owners and is registered in all 50 States.