Employer-Sponsored & Education Savings Options
| Individual 401(k) Plan | Profit Sharing Plan | |
|---|---|---|
| Highlights | A version of the popular 401(k) plan, simplified for owner-only businesses. It includes salary deferral, profit sharing, and loan provision features |
A flexible plan giving employers the discretion to make tax deductible contributions for their employees and to annually change the rate contributed. The plan does not allow salary deferrals. |
| Advantages |
|
|
| Target or Typical Plan Sponsor | Owner-only business including partners and spouses. Common law employees are not supported. | All employers including owner-only businesses |
| Maximum Annual Contributions | Employer: Lesser
of 100% of compensation or $49,000 (the same in 2011)[1] Employee: $16,500 (the same in 2011)[1] [2] |
Employer: Lesser of 100% of compensation or $49,000 (the same in 2011)[1] |
| Maximum Employer Deduction |
25% of participating employee compensation. Additional rules apply:
|
25% of participating employee compensation. Additional rules apply:
|
| Deadlines | Established by last day of plan year and funded by tax filing deadline, including extensions | Established by last day of plan year and funded by tax filing deadline, including extensions |
| Eligibility Requirements |
No service or age requirements EGTRRA: One year of service (1000 hours) and reaching age 21 |
Service and age requirements optional |
| Vesting | Immediately 100% vested | Various vesting schedules allowed; from immediate vesting to a 6-year graded or 3-year cliff schedule |
| Loans Available | Yes | Yes |
| Withdrawals | Unlike an IRA, withdrawals generally not permitted until a specified event as identified in the plan occurs (eg. reaching 59½, normal retirement age, death, disability, separation from service) | |
| Plan Compliance, Testing and Government Reporting | Annual 415 and 402(g) testing required Annual filing of IRS Form 5500-EZ required for plans with more than $250,000 in assets, IRS Form 1099-R must also be filed for distributions |
Annual 415 and top-heavy testing required Annual filing of IRS Form 5500 or 5500-EZ may be required, IRS Form 1099-R must also be filed for distributions |
| Calculator | Compare savings among these plans with the Individual 401(k) calculator | |
| Coverdell ESA | 403(b)(7) | |
|---|---|---|
| Highlights |
A Coverdell Education Savings Account is a trust to which anyone can contribute for the education expenses of a child. Education includes elementary, secondary, or post-secondary institutions If the designated beneficiary does not use up all the funds, the remaining funds can be transferred to another child |
A 403(b)(7) Custodial Account allows individuals participating in a 403(b) plan to move their assets from tax-sheltered annuities to mutual funds The custodial account follows the rules set by the plan Contributions and investment earnings grow tax-deferred until withdrawn |
| Eligibility |
Designated beneficiary can be any child under the age of 18 Grantor must meet Adjusted Gross Income (AGI) requirements to fund the account (AGI less than $110,000 for single filers and $220,000 for joint filers) |
Employees, former employees, or retired employees with an account in a 403(b) plan |
| Contribution Limits |
Up to $2,000 per child per year Note: Anyone, even the beneficiary, may contribute as long as AGI is less than $110,000 for single filers and $220,000 for joint filers |
Individual may contribute up to $16,500 plus $5,500 (the same in 2011) catch-up (age 50 and above) Employer contributions cannot be deposited directly into this account; however, rollover contributions can include employer (match) contributions |
| Tax Advantages | Contributions are not tax deductible, but earnings grow tax-free | Contributions and investment earnings grow tax-deferred until withdrawal, at which time they are taxed as ordinary income |
| Withdrawals | Qualified withdrawals are tax-free; earnings on unqualified withdrawals are taxed as regular income to beneficiary, plus a 10% penalty | Withdrawals (except non-deductible contributions) are taxed as regular income |
| Timing | Withdrawals may be taken at any time tax-free if used for qualified expenses (eg. tuition, room, board, fees, supplies) | Withdrawals from 403(b)(7) accounts follow the same rules outlined by the plan's provisions |
| Required Distributions | Funds must be used before the child turns 30[1] | Same as Profit Sharing / Pension Plans |
| Deadline to Establish | Tax filing deadline for the year of
the contribution Note: Account must be opened after the child is born and before child turns 18 |
N/A |
| Deadline for Contributions | Tax filing deadline for the year
of the contribution Note: No contributions can be made after the child turns 18 |
Employee contributions must be sent as deferrals are made |
