FAQs About Individual 401(k) Plans
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, you 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 I establish an Individual 401(k) if my business has employees?
- What is the deadline for depositing salary deferral contributions?
- Can I take a loan from an Individual 401(k)?
- Can I also make contributions to an IRA or a Roth IRA?
- Why use PrincipalTrust?
- Individual 401(k) Common Transfer FAQs
What are the features of an Individual 401(k)?
- Self-directed investment account
- Up to $45,000 in contributions for 2007[1] ($45,000[2] + $5,000[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 $225,000[1]. Individuals with income greater than this level can usually make the maximum contribution of $45,000[2] without using the salary deferral feature.
- [1] $225,000 is the annual compensation cap for 2007. Future indexing is in $5,000 increments.
- [2] $45,000 is the annual contribution limit for 2007. Future indexing is in $1,000 increments.
- [3] $5,000 is the annual catch-up contribution limit for 2007.
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 your total contribution per individual, including deferrals, cannot exceed the lesser of 100% of compensation or $45,000[2] annually. (If you are age 50 or older, an additional $5,000[3] catch-up deferral is allowed.)
Can I establish an Individual 401(k) if my business has employees?
No. The only other employee that 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 a traditional 401(k) (or other type of plan). This is due to the additional administrative burden brought on by additional participants. If you find yourself in this situation, please contact us at 800.209.9010 to find out about other products that are available to you.
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 participants' 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 I take a loan from an Individual 401(k)?
Yes. Loans are available with our Individual 401(k) plan.
Can I 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 PrincipalTrust?
Investment Options - Unlike other retirement programs, investments for the PrincipalTrust 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 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) calculations
Customer Support is available toll-free at 800.209.9010, Monday through Friday 8:00 am to 5:30 pm EST. Also available is a plan sponsor administration manual (PDF) for answering any questions you may have.
Easy to Get Started - To open a PrincipalTrust 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. If you have further questions, call our Client Contact Center toll-free at 800.209.9010 (representatives available Monday through Friday 8:00 am to 5:30 pm EST).
Please note: A brokerage account must also be setup with an investment firm who is a partner of PrincipalTrust. Visit our list of partnering firms.Individual 401(k) Common Transfer Questions
How do I convert my PrincipalTrust Profit Sharing Plan to a PrincipalTrust Individual 401(k) and what forms do I need to fill out and send to PrincipalTrust? To do this, you will need to:
- Complete an Individual 401(k) Adoption Agreement packet
- 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
- 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 PrincipalTrust Profit Sharing Plan to a PrincipalTrust Individual 401(k)?
You will be charged the current year annual fee on the Profit Sharing plan plus any outstanding fees and the acceptance fee and first year annual fee for the Individual 401(k). We will not charge you a transfer fee for the Profit Sharing plan.
How do you convert a Profit Sharing Plan with another trustee to a PrincipalTrust Individual 401(k)? You will need to:
- Complete an Individual 401(k) Adoption Agreement along with a Transfer Authorization Form/Letter
- Establish a PrincipalTrust Individual 401(k) plan at a brokerage firm who is a partner of PrincipalTrust. For a listing of those partners, please contact us at 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.
