One-person 401(k) plans can provide a valuable source of retirement savings for
successful entrepreneurs. Given the right circumstances, such plans allow large
contributions on behalf of a business owner and maintain flexibility for making
contributions in future years.
For 2015, a business owner can make an elective deferral contribution of up to $18,000
(and an additional $6,000 catch-up contribution if he or she is age 50 or older at
year-end) plus an employer contribution of up to 20% of self-employment (SE) income
unreduced by the elective deferral or 25% of compensation.
The total contributions (elective deferrals of up to $18,000, plus the employer
contribution) cannot exceed the lesser of (1) 100% of the participant's SE income or
compensation or (2) $53,000 for 2015. Catch-up contributions to 401(k) plans of up to
$6,000 in 2015 are not included in the annual additions limit.
Example: Maximizing contributions with a one-person 401(k) plan.
Kevin, age 63, is the sole owner and employee of Training Solutions, a sole
proprietorship. In 2015, Kevin earns $145,000 (net of the SE tax deduction) and
wishes to maximize contributions to a retirement account. He believes the business
will probably continue to be profitable, but would like the flexibility of
determining the amount to contribute each year. Kevin does not expect to hire
The following table reflects the maximum amount that Kevin can contribute to a 401(k)
plan for 2015.
|Employer contribution ($145,000 - 20%)
|Elective 401(k) deferrals
|Contributions subject to annual limit
|Total contributions for 2015
As an additional benefit, a business owner can borrow from his or her 401(k) plan if
the plan document so permits. The maximum loan amount is 50% of the account balance
or $50,000, whichever is less.
When the business employs someone other than just the owner, 401(k) contributions may
be required for the other employees, in which case the plan would become a standard
401(k) plan with all the resulting complications. However, the plan can exclude from
coverage any employee who is under age 21 and any employee who has not worked for at
least 1,000 hours during any 12-month period.
Also, if the business's only other employees are the owner's spouse and/or children, a
401(k) plan covering those individuals may be even more attractive than a one-person
401(k) plan, especially for owners hitting the $53,000 contribution limit.
This publication is distributed with the understanding that the author, publisher and
distributor are not rendering legal, accounting or other professional advice or
opinions on specific facts or matters, and, accordingly, assume no liability
whatsoever in connection with its use. The information contained in this newsletter
was not intended or written to be used and cannot be used for the purpose of (1)
avoiding tax-related penalties prescribed by the Internal Revenue Code or (2)
promoting or marketing any tax-related matter addressed herein. © 2015