By: Michael Siggins, CPA
5/31/2011
Thanks
to the Economic Growth and Tax Relief Reconciliation Act of 2001, known
as EGTRRA, small businesses with one owner/employee can benefit greatly
from tax deferred contributions to an Individual or “Solo” 401(k)
retirement plan.
The
Solo 401(k) differs from the commonly used SEP plans, Simple Plans, and
Defined Benefit (DB) plans in that it consists of both a profit sharing
and salary deferral contribution, usually leading to higher
tax-deductible contributions for the owner/employee. The
other advantage of the Solo 401(k) is that the owner/employee can take
advantage of a loan of up to $50,000 from the 401(k) at any time without
any penalties or taxes. There are certain restrictions, which are outlined below:
-cannot exceed $50,000 or ½ of the balance of the 401(k)
-payments must be made on time (monthly or quarterly)
-5 year maximum repayment term (except in the case of home
purchase)
This can be participated in by sole proprietorships, partnerships, or corporations. For
numerous tax reasons, most business qualified to take advantage of the
Individual 401(k) plan are structured as an S corporation. The S corporation would calculate their 401(k) contributions as follows:
Salary Deferral
-100% of W-2 earnings, up to $16,500 ($22,000 if 50+)
Profit Sharing Contribution
-25% of W-2 Earnings
If possible, both of these items should be maximized, allowing the full $49,000 ($54,500 if age 50+) contribution.
Most
business retirement plans have requirements that every full-time
employee be eligible to participate in it, and this plan is no
different; subject to the same limitations of any other 401(k). Employees allowed to be excluded from the plan offering are:
-independent contractors (1099 employees)
-employees under age 21
-part time employees working less than 1,000 hours per year
-employees that have been with the business less than one year
Give us a call or drop us an email today to get started on your Individual 401(k).
