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Are you self-employed or an independent contractor?  Maybe you're employed full-time, but operate a small business and/or you receive income that's reported on a Form 1099?  If so, you may be eligible to establish an Individual 401(K) plan. It is a retirement plan that designed specifically for owner-only owned businesses, but may include a spouse and it allows business owners to put more away for themselves (and take a tax deduction) than many companies typically put away for their employees.  For most owner-only businesses and Form 1099 recipients, the SEP-IRA has long been the most commonly used plan.

An Individual 401(K) plan has these advantages over SEP-IRAs:

  • Higher contribution limits

  • The ability to borrow from plan assets at low rates

  • High income earners, who cannot contribute to a Roth IRA, have no income restrictions and can add the Roth provision to an Individual 401(K) and gain the potential to benefit from tax-free withdrawals in retirement.

Individual 401(k) 2022Contribution Limits Compared to Other Plans:


As someone who is self-employed you serve as the employee AND employer.  As an employee, you are allowed to contribute up to $20,500 of compensation (income) to an Individual 401(k) as the employee.  As the employer, in an incorporated business, you are allowed to contribute up to 25% of compensation (20% for sole proprietors) to an Individual 401(k).  These two (2) contributions as employee AND employer cannot exceed $61,000 unless the participant is older than 50 years of age.  Participants older than 50 years of age can contribute an additional $6,500 annually as a catch-up contribution bringing the total maximum contribution to $67,5000.

Need working capital for your business?  If you have funds in other retirement accounts such as an IRA or former employer's retirement plan (401(k), TSP, pension, profit sharing, etc.), you can transfer (rollover) those funds to an Individual 401(k) plan and instantly create a self-funded "line of credit" for you and your business based upon the loan feature of the Individual 401(k).

Unlike the SEP-IRA, SIMPLE plans, and traditional IRAs, an Individual 401(k) allows the participant to borrow up to 50% of their account balance or $50,000, whichever is less, at competitive rates and a repayment period up to five (5) years for general purpose loans or longer when used towards the purchase of the participant's primary residence.  Failure to repay loans from an Individual 401(k) plan result in similar tax consequences and penalties associated with other retirement plan withdrawals on the outstanding balance of the loan.

Individuals that earn more than $144,000 and joint filers that earn more than $214,000 cannot contribute to a Roth IRA.  A Roth IRA account is an account where the earnings on after-tax contributions become tax-free when the owner reaches age, 59 1/2 AND the account has been established for at least five (5) years.  The income restriction imposed on Roth IRA contributions do not apply to the Roth 401(k) that can be established under the Individual 401(k) plan, thereby allowing high-income earners the potential to receive tax-free income in retirement.

Like large employer 401(k) plans, the most common investment choice offered within Individual 401(k) plans are mutual funds.  Mutual funds offer professional investment management, diversification, and reasonable initial investment levels. An Individual 401(k) plan will offer a broad array of investment choices from conservative to aggressive allowing your funds the potential to grow in value over time.

Many of the administrative functions associated with large employer 401(k) plans aren't required for the Individual 401(k) plan and therefore the fees associated with adopting and maintaining an Individual 401(k) are substantially less.  These fees vary from provider to provider, but can be a few hundred dollars or less, especially when plan assets are less than $250,000.

Click here to contact us or call today at 901-312-9166 to learn more about the Individual 401(k) plan.  Jones Wealth Management Group does not provide tax advice.  Please consult your tax professional as it pertains to your situation.

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