Self Employed 401k
Individual 401k plan for the self employed
"Self Employed 401k" is a term used to describe the Individual 401k, one of the newest retirement plans to benefit the self employed and small business owner.
Self Employed 401k plans were developed due to the passage of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) that went into effect January 1st, 2002. The new law made several changes to the existing rules of 401k plans. These changes made the Self Employed 401k attractive to certain small business owners. Prior to this law going into effect a self employed business owner would frequently setup a SEP IRA or Keogh plan since they could make a comparable retirement contribution with less administrative expense.
How does the Self Employed 401k benefit the self employed?
For those that qualify, the Self Employed 401k can allow greater retirement contributions at identical income levels compared to SEP-IRA, SIMPLE-IRA and Keogh plans. Greater contributions can mean increased tax deductions and lower taxable income. In addition, some Self Employed 401k plans allow for tax free loans. Loans must be repaid according to the loan amortization schedule or may result in a loan default causing taxes as well as IRS penalties.
Who is eligible to establish a Self Employed 401k for their business?
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 employees may be able to exclude them from plan participation. Independent contractors employed by your business are excluded from the plan. 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 nonresident alien employees
- Certain union employees
Learn more about the Self Employed 401k.