Also known as individual(k)s or solo 401(k)s, these retirement plans provide much the same profit-sharing advantages as a typical 401(k), with less complexity and lower costs.
Are you eligible to participate in an individual 401(k)?
The deadline to open a 401(k) and to contribute for 2017 is December 31st, 2017. To be eligible to benefit from the individual(k) plan, investors must meet only two requirements:
Self-Employed: You are self-employed and expect to both generate income from your business and make contributions to this Individual 401(k) plan. Your business must be a sole proprietorship, partnership or corporation.
No Employees: Your business does not have employees. The business owners or partners are considered “owner employees” rather than just “employees.” Certain employees are excluded from coverage: Employees under 21, Employees that work less than 1000 hours annually, union employees, non-resident alien employees.
- As an employee of your own business, you can make a salary deferral of up to $18,000 into your plan. If you are over 50 years of age, an additional “catch-up” amount of $6,000 is allowed.
- On the profit-sharing side, you may make deductible contributions (deferral + profit-sharing portion) may not exceed $54,000 (or $60,000 if you are 50 or older). For 2018 the maximum contribution is $55,000 (or $61,000 if you are 50 or older).
- The plan administrator can be a third party, or the business owner, spouse, or partner may play this role.
- You have the ability to borrow funds from your plan.
Advantages of a individual(k) versus a SEP IRA
- You can loan yourself up to $50,000 from an individual(k).
- Compared to a SEP IRA, you can contribute more to an individual(k) on less income.
- You can administer and self-trustee your individual(k).
- With an individual(k), there’s no UDFI tax on leveraged real estate.
It is important to note that a Roth 401(k) option is available for this plan allowing the employee salary deferrals to be made after tax. However, the profit-sharing contributions must be made on a pre-tax basis.
Self-directed individual 401(k) plans are able to use many different types of alternative investments to grow retirement income. Additionally, if you wish to purchase leveraged real estate but avoid unrelated business income tax (UBIT), this is a great plan to consider.