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- State Farm Bank® Full Service Financial
The Individual 401(k) for Small Business Retirement Plans
Feb 22, 2011By Staff writer State Farm™ Employee
If you own a business and are its only employee, you can generally save more money for retirement through a 401(k) plan than with most other types of small business retirement plans. It’s like any other 401(k) plan but with one big difference: only the owner(s) of the company, and the owner’s spouse, if he or she works there, are eligible to participate.
Traditional 401(k) plans were designed for large companies. Each year, a firm has to file reports with the IRS on the plan, including an analysis to show that the plan does not favor the company’s highest-paid employees. However, if the company has only owner-employees, then the filing requirements decrease.
Once an Individual 401(k) plan has been established, the owner(s) of the firm and their employed spouses can contribute $16,500 or 100% of their W-2 compensation for 2011 (whichever is less). In addition, the firm can make a contribution of up to 25 percent of total W-2 compensation, with a maximum contribution of $49,000. However, If the owner(s) is 50 or older, the salary deferral can be up to $22,000 plus the company contribution of up to 25 percent of compensation – with a maximum of $54,500. The salary deferral contributions can be pre-tax dollars or designated Roth contributions, which are after-tax funds. All contributions from the company are pre-tax dollars. If the business has an off year, it doesn’t have to make a profit-sharing contribution, which makes the Individual 401(k) flexible.
The Individual 401(k) plan may allow small business owners to shelter more income from taxes than other types of qualified retirement plans. People who own businesses that are likely to expand by adding employees should consider another type of retirement plan. Adding a common-law employee means the Individual 401(k) is no longer an option, but a Traditional 401(k) plan can still be used.
Neither State Farm nor its agents provide tax or legal advice. Please consult your own adviser regarding your particular circumstances.
