An individual 401(k), also referred to as a solo 401(k) or uni 401(k), is a retirement plan designed specifically for business owners and their spouses. In many ways, individual plans work in the same way as traditional 401(k)s, but there is a key difference: individual 401(k)s are exempt from most of the Employee Retirement Income Security Act (ERISA) rules that traditional 401(k)s are subject to.
Who Can Benefit from an Individual 401(k)?
Like traditional 401(k) plans, the primary benefit of an individual 401(k) is the ability for a business owner to reduce their taxable income and take advantage of tax deductions by making pretax contributions. If the owner’s spouse works for the business, they can also be included in the plan. If there are any other eligible (common-law) employees, outside of the owner and spouse, however, the business would not be eligible to use the individual 401(k).
Business owners with full-time employees who are older than 21 will generally be ineligible for the individual 401(k) and will need to choose another retirement plan avenue for making contributions.
How Much Can Be Contributed to an Individual 401(k) Plan?
Individual 401(k)s are subject to the same annual contribution limits as traditional 401(k)s.
2024 | 2025 | |
Elective deferral limit1 | $23,000 | $23,500 |
Catch-up contributions (based on age at end of calendar year) | ||
Individuals ages 50–59 and older than 63 | $7,500 | $7,500 |
Individuals ages 60–63 | N/A | $11,250 |
Total employer/employee contribution limit with catch-up contribution (based on age at end of calendar year) | ||
Individuals younger than 50 | $69,000 | $70,000 |
Individuals ages 50–59 or older than 63 | $76,500 | $77,500 |
Individuals ages 60–63 | N/A | $81,250 |
401(a) compensation limit2 | $345,000 | $350,000 |
1 Employee deferrals to all 401(k) and 403(b) plans must be aggregated for purposes of this limit.
2 401(a) compensation limit, the amount of earned income that can be used to calculate retirement account contributions. All compensation from a single employer (including all members of a controlled group) must be aggregated for purposes of this limit.
For sole proprietors, employer profit-sharing contributions are limited to 25 percent of compensation or 20 percent of net self-employment income. If self-employed, a tax advisor should be consulted to confirm the maximum allowable profit-sharing contribution amount.
Employer contributions can be made by the employer’s tax-filing deadline, including extensions. Employee deferrals should be made as soon as administratively possible but no later than the employer’s tax-filing deadline, including extensions.
Please note: Some plan documents may allow for after-tax and Roth employee deferrals to be made as well.
Testing
Nondiscrimination testing - a series of calculations designed to ensure that a 401(k) plan does not unfairly benefit a certain employee or group of employees - is not required because there are no common-law employees.
Distributions
Account owners are eligible to withdraw assets from the plan when they meet one of the following triggering events:
- The plan’s normal retirement age (usually 59½)
- Permanent disability
- Separation of service
- Plan termination
Some individual 401(k) documents may also allow for distributions due to financial hardship and in-service distributions prior to one of the triggering events listed above.
Required minimum distributions (RMDs) must begin at age 73.* The RMD deferral option available for some participants in traditional 401(k)s is not available for individual 401(k) owners because they generally own more than 5 percent of the company.
Tax Treatment of Distributions
Any rollover-eligible distributions taken from plans that are not rolled over to another IRA or retirement plan will be subject to 20 percent mandatory federal tax withholding. These distributions are taxed at ordinary income tax rates (unless deferrals were made on a Roth or after-tax basis), and early distributions are subject to a 10 percent penalty.
Distributions rolled over to another IRA or eligible retirement plan are done so as a direct rollover and are not subject to tax or penalty.
Vesting
Participants are always 100 percent vested in employee and employer contributions.
Loan Feature
An individual 401(k) can be designed to allow a loan feature for participants.
Administration
Plans with total assets less than $250,000 are exempt from the Form 5500 filing requirement, which is an annual reporting form for certain pension and welfare benefit plans, including 401(k)s. Once total plan assets reach $250,000, the employer will be required to file Form 5500-EZ each year. If an individual 401(k) is terminated, the employer is required to file Form 5500 for the year of termination, regardless of plan size.
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.
* For individuals who turned age 70½ before January 1, 2020, RMDs must begin at age 70½. For individuals who turned 72 between January 1, 2020, and January 1, 2022, RMDs must begin at age 72.
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