Individual 401(k) Plan Frequently Asked Questions
Owner-only businesses including partnerships now have a greater opportunity to benefit from both the salary deferral and employer contribution features of a 401(k) plan. Because of tax law changes under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), employers may be able to contribute more to the plan on a tax-deferred basis than previously allowed. And because the Individual 401(k) is only for owners and their spouse and partners and their spouses, they will avoid the costly administrative burden of a traditional 401(k) plan.
- What are the features of an Individual 401(k)?
- Who should open an Individual 401(k)?
- Are there advantages of an Individual 401(k) over a standard Profit Sharing or Money Purchase Pension plan?
- Can someone establish an Individual 401(k) if his/her business has employees?
- What is the deadline for depositing salary deferral contributions?
- Can someone take a loan from an Individual 401(k)?
- Can someone also make contributions to an IRA or a Roth IRA?
- Why use Principal Trust Company?
- Individual 401(k) Common Transfer FAQs
What are the features of an Individual 401(k)?
- Self-directed investment account
- Up to $54,500 in contributions for 2009 and 2010[1] ($49,000[2] + $5,500[3] catch-up deferral for owners age 50 or older)
- Loans available
Who should open an Individual 401(k)?
The Individual 401(k) is designed for owner-only businesses looking to save more for retirement than previously possible with a traditional small business retirement plan.
The plan maximizes contributions for a sole proprietor or partnerships with earned income of less than $245,000[1]. Individuals with income greater than this level can usually make the maximum contribution of $49,000[2] without using the salary deferral feature.
- [1]
- $245,000 is the annual compensation cap for 2009 and 2010. Future indexing is in $5,000 increments.
- [2]
- $49,000 is the annual contribution limit for 2009 and 2010. Future indexing is in $1,000 increments.
- [2]
- $5,500 is the annual catch-up contribution limit for 2009 and 2010.
Note: This chart is for demonstration purposes only. Actual contribution amounts may vary.
Note: A spouse employee and partners and their spouses may be included; however, the Individual 401(k) plan does not support accounts for common law employees. For businesses that include common law employees or less than 5% owners, please ask about other products that are suitable for you.
Are there advantages of an Individual 401(k) over a standard Profit Sharing or Money Purchase Pension plan?
Yes. Because of the law changes made by EGTRRA, an employer can now 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, including deferrals, cannot exceed the lesser of 100% of compensation or $49,000[2] annually. (Individuals age 50 or older can make an additional $5,500[3] catch-up deferral.)
Can someone establish an Individual 401(k) if his/her business has employees?
No. The only other employee who may be included in the Individual 401(k) besides the business owner is the owner's spouse, partners, and partner's spouse. If the business employs additional employees, the business will be required to transition to another type of plan. Please contact us at 1.800.209.9010 to find out about other products and services available.
What is the deadline for depositing salary deferral contributions?
The Department of Labor (DOL) regulations state that salary deferral contributions are to be made as of the earliest date on which such contributions can reasonably by segregated from the employer's general assets (CFR 2510.3-102). In general, salary deferral contributions are calculated upon the determination of the participant's compensation/earned income using the participants' salary deferral agreement. Please contact your tax or legal advisor with questions specific to how and when your compensation or earned income is determined.
Can someone take a loan from an Individual 401(k)?
Yes. Loans are available with our Individual 401(k) plan.
Can someone also make contributions to an IRA or a Roth IRA?
Yes. A small business owner who elects to open an Individual 401(k) plan may also contribute the maximum dollar amount allowable under current law to an IRA or Roth IRA. However, contributions may not be deductible.
Why use Principal Trust Company?
Investment options - Unlike other retirement programs, investments for the Principal Trust Company Individual 401(k) are not limited to mutual funds. Because our Individual 401(k) is fully self-directed, the investor can select from the investments available in the brokerage account - stocks, bonds, and mutual funds.
Full service - Our standard services include:
- IRS approved prototype document
- Trustee services
- Easy-to-complete adoption agreement
- Recordkeeping of contributions, distributions, and loan payments
- Compliance services provided annually:
- IRS Form 5500 EZ preparation
- Testing of 402(g) deferrals and 415 contribution limits
- IRS Form 1099-R for distributions
- Required Minimum Distribution (RMD) calculations
Customer Support is available toll-free at 1.800.209.9010, Monday through Friday 8:00 AM to 5:30 PM (Eastern time). Also available is a plan sponsor administration manual (PDF: 681 KB) for answering any questions you may have.
Easy to Get Started - To open an Individual 401(k) plan, download and complete our Individual 401(k) package. You'll find step-by-step instructions for filling out the adoption agreement.
Please note: A brokerage account must also be setup with an investment firm who is a partner of Principal Trust Company.
Individual 401(k) Common Transfer Questions
How do I convert my Profit Sharing Plan to a Principal Trust Individual 401(k)? What forms do I need to fill out and send?
You'll need to:
- Complete an Individual 401(k) Adoption Agreement packet (PDF: 703 KB)
- Change the registration on your existing Profit Sharing Plan to an Individual 401(k) Plan
- Fill out and submit the Individual 401(k) Consolidation Request Form (PDF: 78 KB)
- Send a check with the adoption agreement for the $100 acceptance fee, $250 annual fee and $75 for each additional participant to the address specified on the adoption agreement
What are the costs to convert a Profit Sharing Plan to a Principal Trust Individual 401(k)?
You will be charged the current year annual fee on the Profit Sharing plan plus any outstanding fees. In addition, you'll be charged the acceptance fee and first year annual fee for the Individual 401(k). You won't be charged a transfer fee for the Profit Sharing plan.
How do you convert a Profit Sharing Plan with another trustee to a Principal Trust Individual 401(k)?
You will need to:
- Complete an Individual 401(k) Adoption Agreement (PDF: 703 KB) along with a Transfer Authorization Form/Letter (PDF: 164 KB)
- Establish a Principal Trust Individual 401(k) plan at a brokerage firm who is a partner of Principal Trust Company. For a listing of those partners, please contact us at 1.800.209.9010.
- Send a check with the adoption agreement for the $100 acceptance fee, $250 annual fee and $75 for each additional participant to the address specified on the adoption agreement.
What costs are associated with this type of transfer?
We will charge you the acceptance fee and first year annual fee for the Individual 401(k). You will need to check with your current trustee to find out the fees they will charge.
