tax advantages of individual 401k in Johns Creek
tax advantages of individual 401k in Johns Creek
Year end tax strategies using an individual 401k
If you an independent business owner facing a profit at the end of the year, you should consider the tax advantages of implementing an Individual 401k.
An individual 401k is not only a smart way to prepare for retirement, it's also a great tax strategy. You can put up to $49,000 away! Compare that to $5,000 on an individual basis ($6,000 if you are age 50+)
The Individual 401 (k) is a Profit Sharing/401(k) plan designed for the sole proprietor, independent contractor, or business owner with no employees (other than family members). This plan allows such businesses the opportunity to maximize tax deductible retirement contributions, without giving up access to or control of their assets.
Key benefits of an Individual 401(k) plan:
Permits pre-tax salary deferral contributions.
Permits discretionary profit sharing contributions.
No IRS Anti Discrimination Testing.
All accounts are 100% immediately vested.
Tax Free loans are available (up to 50% of account value, up to maximum of $50,000)
Distributions are governed by the plan document and may be restricted.1
Selected plans offer a Roth 401(k) option; discuss with your provider.
Who can establish?
Sole Proprietors
Independent Contractors
Any small business with all related employees (i.e., only family members)
Any partnership with no W2 employees (i.e., owners only)
Family offices2
Annual contributions:
Defer up to $16,500 ($22,000, if age 50+), through payroll deductions.
Elective employer contributions, up to 25% of profit (max $49,000/year). 3
Maximum eligible compensation: $245,000.
[Note: Deferrals and employer contributions cannot exceed the lessor of 100% of each employees compensation or $49,000 per employee. Catch up deferrals are not considered in this limit.]
What if I have parttime (nonfamily) employees?
Eligibility: You can structure your Plans eligibility, whereby parttime employees are not eligible to participate in the plan. This is a typical provision of many 401(k) plans.
Vesting: You can also structure your vesting (on employer contributions), whereby it does not provide years of credit to parttime employees. This, too, is a typical provision of many 401(k) plans.
What happens if I hire fulltime (nonfamily) employees?
In the event that your business grows, whereby you decide to hire fulltime (nonfamily) employees, you can easily convert your Solo 401(k) to a traditional 401(k) plan. Your fees will be higher as they will be inclusive of required annual Compliance/ Discrimination Testing and Form 5500 services, as the plan would be required to accommodate the nonowner/ nonfamily employees.
1 Amounts withdrawn from retirement plans are generally includable as taxable income in the year received and may be subject to tax penalties if withdrawn before age 59 1/2.
2 A governmental entity may not establish a 401(k) arrangement.
3 Subject to cost of living adjustments.
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