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Is an Individual 401(k) Plan Right for You?

If you can answer “yes” to either of the following questions, then maybe it is: “Are you the sole employee of your business?” or “Does your business employ only you, your co-owners, and spouses?” Chances are – even if you did answer “yes” – you’ve never considered establishing a 401(k) plan to save for retirement because you think they’re strictly for corporations. They’re not. Tax law changes have made 401(k) plans attractive for the very smallest businesses – especially if you’re looking to make substantial contributions.


An Individual 401(k) is a unique retirement savings opportunity designed for corporations, partnerships, and sole proprietorships that employ only owners, their spouses, and certain family members. If you’re an independent consultant, real estate agent, or accountant, an Individual 401(k) may be a good retirement plan option for you.


Currently, the maximum employer contribution to this type of plan is up to 25% of eligible compensation. Additionally, employee salary deferrals are not included in the 25%-of-pay limit. As a result, you can contribute a full 25% of your salary to an Individual 401(k) in addition to the $18,000 salary deferral limit ($24,000 if you’re age 50 or older). However, total 2015 contributions cannot exceed the lesser of 100% of income or $53,000 ($59,000 if you’re 50 or older).


There are also other plan benefits that an Individual 401(k) plan brings to the table:


Flexibility. All contributions are discretionary.


Loans. Loans may be permitted.


Brokerage account transactions. Wells Fargo Advisors offers you the ability to invest in a variety of stocks, bonds and mutual funds with choices for investors at all risk-tolerance levels.


Low cost. Individual 401(k) plan costs can be substantially less than those of traditional 401(k) plans due to reduced administrative requirements.


Take a look at how an Individual 401(k) plan compares with other popular retirement plans for small business owners. Let’s say you are younger than 50 years of age, own an incorporated business and earn $150,000 in salary this year. With a SEP IRA plan, you would be able to contribute $37,500 in 2015 toward your retirement savings. For a SIMPLE IRA plan, you would only be able to contribute up to $17,000. However, with an Individual 401(k), you would be able to contribute up to $53,000 to your retirement fund, increasing the compounding power of your nest egg.


The example shows that you can certainly stand to benefit from the higher contribution amounts allowed with an Individual 401(k). While this plan may be a bit more costly than a SEP IRA or a SIMPLE IRA because of the tax reporting requirements and annual administrative fee, the ability to make higher contributions may make it more cost-effective. Another benefit of this type of plan is that contributions are tax deductible and can accumulate tax deferred until withdrawn. In addition, contribution amounts are completely discretionary, so you have the option each year to change or discontinue them.


Finally, if you have a regular 401(k) plan from a previous employer but are now self-employed, you are able to consolidate your assets into an Individual 401(k). And if you are employed at a company that offers a 401(k) but you also own your own business, you may contribute to both plans (certain limitations apply).


The most important thing about any retirement plan is to begin saving as soon as possible. Your Financial Advisor can help you decide what the best retirement plan option is for you.



Wells Fargo Advisors is not a legal or tax advisor.

This article was written by Wells Fargo Advisors and provided courtesy of George Cabalu, Managing Director - Investments in McLean, VA at 703-761-4794.

401(k) withdrawals are subject to ordinary income tax and may be subject to a federal 10% penalty if taken prior to age 59 ½.


Wells Fargo Advisors does not provide legal or tax advice. Be sure to consult with your tax and legal advisors before taking any action that could have tax or legal consequences. 

Wells Fargo Advisors, LLC, Member SIPC, is a registered broker-dealer and a separate non-bank affiliate of Wells Fargo & Company.

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