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Individual 401(k) Plan

Many small business owners have a powerful option when planning for retirement. The Economic Growth Tax Relief Reconciliation Act of 2001 (EGTRRA) significantly changed the tax laws governing 401(k) plans. These changes made the well-known 401(k) plan a reasonable and favorable option for the owner-only business.

How the Individual 401(k) plan works

Because of the law changes made by EGTRRA, an employer can take a full deduction for elective deferrals in addition to the maximum 25% deduction allowed for a profit sharing contribution.

Please note, however, that the total contribution per individual cannot exceed the lesser of 100% of compensation or $52,000 annually in 2014. If age 50 or older, an additional deductible $5,500 catch-up deferral is allowed and is not subject to these limits.

Partners and spouses who are employees may be included; however, the Principal Trust Company Individual 401(k) plan does not support accounts for common law employees. For businesses with common law employees, please ask about other products.

Note: Each partner must own more than 5% of the capital interest or profits. If he or she does not, this plan is not the right solution for your business.

Who can open an Individual 401(k)?

The Individual 401(k) plan is designed for owner-only businesses and owner spouses, if applicable. The plan may be a good option for business owners looking to save more for their retirement than previously possible with a traditional small business retirement plan.

For example, an Individual 401(k) plan can help business owners save more for retirement as the plan maximizes contributions for a sole proprietor with net income of $260,000 in 2014. The owner is eligible to contribute the maximum 25% of adjusted earned income for the profit sharing contribution and defer the maximum of $17,500. If the sole proprietor is over 50 years old, he is allowed an additional deductible $5,500 catch-up.

Additional Information

Investment Options - Unlike other retirement plans, investments for the Individual 401(k) are not limited to mutual funds. Because our Individual 401(k) is fully selfdirected, the investor can select from the investments available in the brokerage account: stocks, bonds, and mutual funds.

To Get Started - To open a Principal Trust Company Individual 401(k) plan, first download our IRS approved plan document. A brokerage account must then be set up with an investment firm.

The IRS approved plan document provides step-by-step instructions for filling out the application. Also available online is a plan sponsor administration manual for answering your questions. Customer Support is available toll-free at 1.800.209.9010 Monday through Friday 8:00 a.m. to 5:30 p.m. (Eastern time).

Comprehensive Plan Services - Our standard services include:

  • IRS approved prototype document
  • Trustee services
  • Easy to complete adoption agreement
  • Recordkeeping of:
    • Contributions
    • Distributions
    • Loan payments
  • Annual compliance services including:
    • IRS Form 5500-EZ preparation
    • Testing of 402(g) deferrals and 415 contribution limits
    • IRS Form 1099-R for distributions
    • Required Minimum Distribution (RMD)

For more information about the Individual 401(k) Plan, visit our Frequently Asked Questions.

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