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A one-participant 401(k) plan, often known as a solo or self-directed 401(k), is generally a good retirement plan option for solo entrepreneurs. Although this plan typically has the same requirements as any 401(k) plan, providers may offer solo retirement programs that are less complex and more cost-friendly.

Big Savings

One advantage of a solo 401(k) plan, compared to a SIMPLE plan or IRA, is the larger contribution limit. You may contribute up to $18,500 annually (and an extra $6,000 if age 50 or older) as an employee, up to 100% of earned income, plus make an additional contribution as the employer. If you’re self-employed, “earned income” is defined as net earnings from self-employment after deducting one-half of your self-employment tax and contributions.

These 401(k) plans also feature tax-deferred contributions and potential growth, and may particularly provide a good retirement solution for higher-income individuals.

As summer approaches, many businesses begin to plan next year’s employee benefit menu. A retirement plan is typically among employees’ most desired benefits, and one of the simplest, most cost-friendly ways to provide one is the Savings Incentive Match PLan for Employees IRA – better known as a SIMPLE IRA plan.

The Basics

Small businesses with 100 or fewer employees that don’t offer another retirement plan generally may establish a SIMPLE IRA. This retirement plan allows employee contributions of up to $12,500 annually, indexed to inflation, and a $3,000 catch-up contribution for employees age 50 and older.

Employer Contributions

Employers may make mandatory contributions to a SIMPLE IRA in one of two ways. The first is to match each employee’s contribution dollar for dollar up to 3% of each employee’s compensation. This option allows employers to reduce matching contributions to less than 3% but at least 1% in no more than two out of five years. The second option is to make nonelective contributions of 2% of the employee’s compensation up to the annual compensation limit of $275,000 for 2018. This option requires employers to contribute for all eligible employees, whether or not they contribute to the plan.

Pros And Cons

There are a few caveats that come with a SIMPLE IRA. If you want higher contribution limits or anticipate growing your company quickly (above 100 employees), other options may prove better. Also, employees younger than age 59 1/2 who make early withdrawals during the first two years of participation in the plan may be subject to an additional tax of up to 25% of the withdrawal, with some exceptions.

However, a SIMPLE IRA is a good retirement plan for a newer company, due to startup and operating costs that are generally less than for a traditional 401(k) and ease of administration. Talk to us to learn more.

A Simple Way To Save – A retirement plan is among employees’ most desired benefits.

Going It Alone Individual – Business – A solo or self-directed 401(k) is a good plan for solo entrepreneurs.

Benefit Now, Pay Later – “Qualified” versus “non-qualified” plans.

Profile – How do Social Security payments change with divorce?

5 Estate Planning Musts – basic estate planning concerns.

Overcoming Disability Business – Address the possibility of an owner’s major disability.

Questions and Answers

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