An individual 401k is a 401k plan designed for the self employed. As opposed to other self employed retirement programs, with an individual 401k, greater contributions may be made at identical income levels. As of 2010 and 2011, the contribution limits are set at $49,000 a year and $54,500 if you’re over the age of 50. The contributions are technically comprised of partial salary deferral contributions and profit sharing contributions.
Benefits
Higher Contribution Limits
- Tax Deductible Contributions
- Tax Deferred Growth
- Contribution Flexibility
- Access to Tax Free Loans
- Cost Effective Administration
- Retirement Plan Consolidation
Roth Individual 401k
Contributions can be made both as a traditional 401k or a Roth 401k. The only difference between the two is that with the Roth 401k, you pay taxes today and earn a tax free withdrawal in retirement. The traditional 401k is tax free now, and you pay taxes when you withdraw it.
Tax Free Loans
Withdrawals prior to retirement can be made in the form of a loan on an individual 401k plan. Loans can be taken out at up to 1/2 the total balance of the 401k but not to exceed $50,000. The loans are received tax free and penalty free granted they are paid back on time over a scheduled period. Generally, the loans obtain a 5 year maximum repayment term and in effect – you’re paying yourself interest! Loans used to purchase a primary residence may be extended to 10-15 years. All loans must be repaid according to the terms and conditions of the loan itself.
Eligibility
Generally, under federal law, you may 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, and …
- Certain nonresident alien employees.
