Individual 401(k) Plan
Many small business owners have a powerful new option when planning for retirement. The Economic Growth Tax Relief Reconciliation Act of 2001 (EGTRRA) has made significant changes to the tax laws governing 401(k) plans. These changes have not created a new type of plan; rather, they have made the well-known 401(k) plan a reasonable and favorable option for the owner-only business.
Prior to 2002, it made no sense for a small business to incur the high costs associated with a traditional 401(k) Profit Sharing plan. These plans were designed for large employers, whereas profit sharing, money purchase pension, SEP, and SIMPLE plans often made more sense for the small business owner. They allowed for the same employer contributions and lacked the high cost and administrative burden of the 401(k).
Now, with the Individual 401(k), the owner-only business may contribute more for retirement than ever before.
What has Changed?
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 $46,000 annually ( in 2008). If age 50 or older, an additional deductible $5,000 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 CompanySM Individual 401(k) plan does not support accounts for common law employees. For businesses that include common law employees, please ask about other products that are suitable for you. Note: Each partner must own more than 5% of the capital interest or profits. If they do not, this plan is not suitable for your business.
Who Can Open an Individual 401(k)?
The Individual 401(k) plan is designed for owner-only businesses and spouses, if applicable. The plan is perfect for business owners looking to save more for their retirement than previously possible with a traditional small business retirement plan.
For example, the Individual 401(k) plan maximizes contributions for a sole proprietor with earned income of less than $230,000 (in 2008) because they are eligible to contribute the maximum 25% profit sharing contribution and defer the maximum of $15,500 in 2008.
Note: This chart is for demonstration purposes only. Actual contribution amounts may vary.
Why Use Principal Trust Company?
Easy to Get Started - To open a Principal Trust Company Individual 401(k) plan, simply download our IRS approved plan document. A brokerage account must also be set up with an investment firm that is a partner of Principal Trust Company. For a listing of those partners, please contact us at 800.209.9010.
You'll find step-by-step instructions for filling out the application. Also available online is a plan sponsor administration manual for answering any questions you may have. And best of all, Customer Support is available toll-free at 800.209.9010 to help walk you through the process, Monday through Friday 8:00 am to 5:30 pm EST.
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 self-directed, the investor can select from the investments available in the brokerage account—stocks, bonds, and mutual funds.
Comprehensive Plan Services - 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 on an annual basis:
- IRS Form 5500-EZ preparation
- Testing of 402(g) deferrals and 415 contribution limits
- IRS Form 1099-R for distributions
- Required Minimum Distribution (RMD)
