Everything self-employed business owners need to know about Individual(k) plans

Image: Everything self-employed business owners need to know about Individual(k) plans

There are many benefits that come along with self-employment and running your own business ; you make your own work schedule, you’re passionate about what you do, and you’re in full control—just to name a few. One advantage that may not be as prevalent in self-employment, however, is benefits.

It’s no secret that having a benefits package through your small business can be expensive. With options available for health insurance, retirement plans, supplemental life insurance, dental insurance, vision insurance, and everything in between, there’s a lot to think about. Offering each and every benefit may be unrealistic for you and your business, but one in particular may help safeguard your financial future: a retirement plan.

The 401(k) plan has become one of the most popular types of retirement plans over the last few decades, offering the highest savings potential of any retirement savings vehicle, tax-free contributions and growth, and additional tax advantages for the business. But many entrepreneurs, sole proprietors, and other small business owners mistakenly believe their company is too small for a 401(k) plan, when in reality, affordable options exist for even owner-only businesses.

Enter the Individual(k) plan.

You might also be interested in: Is my business too small to offer a 401(k)?

What is an Individual(k) plan?

An Individual(k) plan, also known as an owner-only 401(k), Solo(k), uni-K, or employer-only 401(k), is a type of 401(k) plan that is designed specifically for:

  • Owner-only businesses whose only employees are the owner or the owner and spouse
  • Partnerships whose only employees are partners or partners and spouses
  • C and S corporations where the corporation has only one shareholder and the only employees are the shareholder or shareholder and spouse

You can regularly contribute to and save in the Individual(k) just like you could in a 401(k) plan designed for large companies, but they’re unique in that they allow you to decide how much to contribute to the plan as both the employer and the employee. This allows self-employed business owners to maximize their own retirement savings as well as deductions for their business.

Eligibility requirements for an Individual 401(k) plan

To be eligible to start an Individual(k) for your business, you must be a self-employed business owner with no employees—although the Internal Revenue Service (IRS) does allow one exception to this rule for your spouse if they also earn income from the business.

There are no age restrictions for starting an Individual(k) plan; the only income requirement is that you have enough earned income or W-2 wages to support a 401(k) contribution. You will also need to have an Employer Identification Number, and you’ll want to have an idea of the plan design and plan features you’d like to take advantage of, as many retirement plan providers will have more than one Individual(k) option available.

How owner-only 401(k) plans can benefit small business owners

An Individual(k) offers a huge variety of benefits for small business owners; first and foremost, it’s a way to save for retirement that offers contribution limits much higher than those of an IRA. Plus, since you are both the participant and plan sponsor of the plan, contributions can be made in both capacities—allowing you to save until you hit the annual defined contribution limit of $66,000 in 2023 rather than the elective deferral limit of $22,500, in addition to $7,500 in catch-up contributions for those age 50 or older. Not to mention, if your spouse also earns income from the business, they’ll be eligible to participate in the plan as well and you won’t be required to perform annual non-discrimination testing for the plan.

Take a look at the chart below to compare various plans' annual contribution limits for a more thorough side-by-side analysis of your maximum contribution limits allowed by various plan types.

Funding options for Individual(k) plans

Another huge benefit of Individual(k) plans for owner-only businesses that are sole proprietors or partners is the option to fund employer contributions and employee contributions (in certain situations) as a one-time lump sum deposit.

Many times, small business owners are encouraged by their financial advisor or CPA to spend more money at year end as a way to decrease the business’ annual taxes—and an Individual(k) provides a great opportunity to do so in a fiscally responsible way. Depending on the business structure, employers can wait until the business tax filing date to fund contributions as a one-time deposit. Keep in mind, you still need to have a signed deferral election before plan year end for the employee contribution. This gives business owners and their advisors time to assess their business tax liability for the year and determine how much to contribute as the employer in order to reduce their business taxes.

Some providers also offer an automatic funding option for Individual(k) plans, which deposits your employee contributions to the plan automatically on a weekly, bi-weekly, semi-monthly, or monthly basis (based on your payroll schedule), so you don’t have to perform the process manually.

Tax advantages of self-employed retirement plans

There are also a variety of tax advantages that are associated with Individual(k) plans—both for the business and the individual. Depending on your business structure, you can fund profit sharing contributions to the plan up until the business tax-filing deadline, which is a huge benefit for those who find themselves needing last-minute tax breaks at year end.

Additionally, contributions are made on a pre-tax or Roth basis as the employee and profit sharing contributions are tax deductible as the employer. Contributions also grow tax-free while in the account and with the power of compounding interest, can grow significantly over the course of a career.

We understand the importance of saving appropriately for retirement. We also understand that many small business owners don’t have the time or resources needed to adequately run a retirement plan themselves. That’s why our retirement services were designed to be more hands-off for the employer, allowing you to focus on running your business—not your retirement plan. We have retirement plan options available for businesses of all sizes, so even if you are your only employee, we can still help you get started on the path to retirement readiness.

Wondering which plan might be the best fit for you? To learn more about our plan options, contact us at 800-345-6363 to speak with one of our retirement specialists.