Self-Directed Individual(k) Retirement Plans for Small Business Owners

Small business owners are able to take advantage of a beneficial retirement savings account commonly called a self-directed individual(k) plan. These are profit sharing plans with a 401(k) option, but involve more relaxed compliance rules and minimal cost compared to a traditional 401(k). There are also Roth options available for this type of plan—allowing salary deferral contributions to be made on a post-tax basis. Another bonus is that individual(k) accounts can be self-directed.

Individual(k) plans allow corporations, partnerships and sole proprietorships with no employees (aside from you, your spouse, and / or business partner) to make contributions toward retirement. These plans offer the biggest potential benefit for one-person businesses earning between $51,000 and $165,000 taxable compensation per year.

How do individual(k) plans work?

  • Employees can make tax-deferred contributions to their accounts
  • Employers can make contributions to employees’ accounts
  • All employees are considered owners, alleviating some IRS compliance rules
  • Higher contributions are permissible in these accounts (within the limits set forth by the IRS)

All employees are considered owners and as such can make both employee and employer contributions. As an employee for the year 2014, a salary deferral of up to $17,500 can be made into the individual(k) and an additional $5,500 catch-up contribution is allowed for those over 50 years of age. For 2015, that salary deferral rises to $18,000, with a catch-up contribution of $6,000 for those over the age of 50.

In addition to the salary deferral contribution, most plans have a profit-sharing portion that allows for deductible contributions of up to 25 percent of compensation, with total contributions (salary deferral plus profit-sharing match) not exceeding $52,000 per person for 2014 (or $57,500 if over 50) or $52,500 for 2015 (or $58,500 if over 50).

This is a great deal of cash you are allowed to sock away for retirement! If you self-direct your account and max out your contributions each year, your individual(k) gains more capital to make investments that can potentially garner additional income towards retirement.

As mentioned above individual(k) accounts can be self-directed. When a person chooses to use self-directed IRAs and similar plans, they gain complete control over their own retirement funds and decisions. Self-directed retirement plans are popular because of their ability to acquire alternative investments such as real estate, precious metals, oil and gas opportunities, private lending options, and many other assets outside the traditional stock, bond or mutual fund. Self-direction means that as the account owner, you choose your own assets—things you know and understand—at a pace within your comfort zone.

You should consider a self-directed Advanta IRA individual(k) plan if:

  • You are a sole proprietor with no employees other than your spouse or partner(s). The plan trustee and administrator of the plan is simply the business owner, their spouse or a partner. A third-party administrator is acceptable if desired.
  • You are looking for the largest potential contribution for a business without employees.
  • You want the capability of borrowing from your plan.
  • You want to purchase leveraged real estate in your plan and wish to avoid UBIT (unrelated business income tax).

Additional benefits of an individual(k):

  • You can take a non-taxable loan from your account but have to repay it, along with a realistic interest rate, within five years
  • You can take a personal loan from this account an amount of up to 50 percent of its assets, repayment of which is typically made in quarterly installments
  • You can make contributions in cash or property (the value of which must not exceed contribution limits set forth by the IRS)
  • “C” corporations can make contributions in cash, property or corporate stock and take deductions on those contributions within the limits set forth by the IRS
  • Under certain conditions, account owners can lease property owned by these accounts
  • Trustees of these accounts can be the business owner(s) and/or spouse(s)
  • Trustees can manage these accounts using checkbook control methods

It is critical to remember that even though these plans allow certain non-cash contributions, the value of those contributions must not exceed the contribution limits set for the plan by the IRS.

When considering individual(k) accounts it is a good idea to discuss the pros and cons with your financial advisor or tax professional. The benefits are tremendous if your business falls within the requirements, but owning and operating any retirement plan outside the realm of IRS rules can have disastrous results.

If you would like to know more about how self-directed individual(k) plans work, please contact us.

About Jack Callahan

Jack proudly earned his bachelor’s degree in finance and multinational business from Florida State University and his law degree from the University of Florida College of Law. He established Advanta IRA in 2003 and has steadily nurtured and grown the company and the team every year since. Prior to founding Advanta IRA, Jack delivered specialized counsel to real estate investors, small business owners, and real estate professionals on tax, legal and financial matters. As an industry expert, Jack is a frequent speaker on self-directed retirement plans. He is an accredited continuing education instructor for the Florida and Georgia Bar Associations, Florida and Georgia Real Estate Commissions, and The American Institute of Certified Public Accountants.