An Individual 401(k) plan (sometimes referred to as an “owner-only” 401(k) plan) is a retirement savings plan adopted by a business that allows the business owner to make retirement savings contributions. Individual 401(k) plans are intended for businesses with no employees.
An Individual 401(k) plan is easy to establish, simple to administer and allows business owners to make large annual contributions. Because there are no employees, there are no nondiscrimination tests and employers are not required to file annual reports with the IRS until the plan reaches $250,000 in assets. Both pre-tax and Roth (after-tax) contributions are permitted in Individual 401(k) plans.
Individual 401(k) plans are designed to be used by businesses with no employees other than the business owners and their spouses. The business may be structured as a sole proprietor, partnership, or corporation.
To establish an individual 401(k) plan, the employer must sign a written plan document that has been approved by the IRS. The IRS does not offer free Individual 401(k) plan documents. Most 401(k) service providers offer 401(k) plan documents.
The plan document must be signed by the last day of your tax year. For a calendar-year employer, for example, this means the document must be signed by December 31 to make contributions for that year.
You can defer up to $19,000 (for 2019) of your compensation into the plan, plus an additional $6,000 catch-up contribution if you are age 50 or older. Most Individual 401(k) plans are designed to also permit profit-sharing contributions in an amount that can vary from year to year. The maximum profit sharing contribution is 25% of compensation. Total deferrals and profit-sharing contributions for a business owner can reach $56,000 (for 2019), plus an additional $6,000 catch-up contribution if they are age 50 or older.
An Individual 401(k) plan does not affect your ability to make annual contributions to a traditional or Roth IRA. In addition to your Individual 401(k) plan contributions, you can make traditional or Roth IRA contributions of up to $6,000 (for 2019) plus an additional $1,000 catch-up contribution if you are age 50 or older. Participating in the plan may affect your ability to take a tax deduction for a traditional IRA contribution, depending on your income.
In general, the funds in your Individual 401(k) plan cannot be distributed until you reach age 59½, die, become disabled, or terminate the plan. However, Individual 401(k) plans can permit hardship distributions and loans.
There is no IRS filing requirement until an Individual 401(k) plan reaches $250,000 in assets unless the plan is terminated. Each year after the plan reaches the $250,000 threshold, the business will need to file IRS Form 5500, an annual information return, by the end of the seventh month following plan year-end.
An Individual 401(k) plan is designed for owner-only businesses. If you hire employees, you must operate your plan according to the traditional 401(k) plan rules, including conducting nondiscrimination testing and filing Form 5500 annually.