Individual 401(k) Retirement Plan

An Individual 401(k) plan is a qualified profit-sharing retirement plan with a 401(k) option but designed to be less complicated and not as costly as a traditional 401(k).

The types of businesses that can establish an Individual 401(k) include corporations, partnerships, and sole proprietorships.

Also known as a Solo 401(k) or Self Employed 401(k), the Individual 401(k) is a good match if you have no employees or if you are a business where you and your spouse are the only employees with a compensation in excess of $100,000.

The Individual 401(k) offers the biggest potential benefit for one-person businesses earning between $51,000 and $165,000 per year. Individual 401(k)s are not set up for businesses with common-law employees.

Consider a self-directed Individual 401(k) retirement account 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 unrelated business income tax (UBIT).
Contribution Limits 2017 2018
Individual 401(k) $18,000 (+ $6,000 if 50 and over) of salary deferral + up to 25% employer contributions. Combined employee & employer contributions cannot exceed $54,000 per person (or $60,000 if 50 and over) $18,500 (+ $6,000 if 50 and over) of salary deferral + up to 25% employer contributions. Combined employee & employer contributions cannot exceed $55,000 per person (or $61,000 if 50 and over)

Contributions to an Individual 401(k) Plan

With an Individual 401(k) plan, there are two types of contributions that count towards the maximums in the chart above. As the employee of their business, the Individual 401(k) account holder can defer up to $18,500 of their salary into the plan (if you are over the age of 50, then the IRS allows an additional $6,000 catch-up of salary deferral).

In addition to the 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 $54,000 per person for 2017 (or $60,000 if over 50) or $55,000 for 2018 (or $61,000 if over 50).

Roth 401(k) Option

In 2006, the Roth 401(k) was introduced, allowing you to make the salary deferral contributions on a post-tax basis and place them into a tax-free account similar to a Roth IRA. Profit-sharing contributions are still considered a pre-tax contribution. The Roth 401(k) account is well-suited to people who think they will be in a higher tax bracket in retirement than they are present.