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Individual 401(k) Plans

As a small business owner employing only owners and spouses, you may be able to contribute more with a 401(k) than with other retirement plans.

An Individual 401(k) may work well if you have income of less than $200,000 and want to maximize your retirement savings. With an Individual 401(k) you have the flexibility to change how much your business contributes from year to year.

Eligibility to contribute

You can contribute at any age if you are self-employed or a business partner. 

Maximum annual contribution

  • May use a combination of salary deferral and profit sharing contributions
  • Profit Sharing: Up to the lesser of 25% of compensation or $66,000 (2023)
  • Salary deferral: Up to the lesser of 100% of compensation or $22,500 (2023) [$30,000 if over age 50]
  • The total combination of salary deferral and profit sharing contributions may not exceed $66,000 (2023) [$73,500 age 50 and older]

Tax-deductible contributions

As a small business owner, you can deduct your contributions for yourself, and your business partner from your company’s federal taxable income.

Your plan may now allow you to allocate part or all of your deferral to a Roth 401(k). Roth 401(k) salary deferrals are not tax deductible but contributions and earnings have the potential to grow tax deferred.

Taxation of earnings and withdrawals

Tax-deductible contributions and earnings are taxed as ordinary income when withdrawn. Roth earnings may be eligible for income tax free withdrawals if held for five years and attaining age 59 1/2.

Types of investments

Stocks, bonds, mutual funds and Advisory Products available through a Wells Fargo Advisors brokerage account.

Minimal initial investment

Varies by investment option

Withdrawal penalties

10% IRS additional tax if withdrawn before age 59½ unless exception applies.

Exceptions include:

  • Death
  • Disability
  • Substantially equal periodic payments made over life expectancy
  • Termination of service after five years and reaching age 55
  • Qualified military reservist
  • Certain hardship withdrawals
  • Up to $5,000 for qualified adoption / birth expenses

Required withdrawals

Beginning in tax year 2020, the age to start Required Minimum Distributions (RMDs) has been modified from age 70½ to age 72 (Does not affect participants who turned age 70½ on or before 12/31/2019.)

Deadline to set up and fund

  • For taxable years 2020 and beyond, individual 401(k) plans may be set up by tax filing deadlines plus extensions. Note: It can take 30 or more days to establish a plan.
  • Salary deferral portion of the contribution must be deducted from a paycheck prior to year end, with some exceptions for certain business structures.
  • Business owner (employer) contributions may be made up through the business’ tax filing due date plus extensions.

Commissions and fees

Vary by account and investments

Want to learn more about Individual 401(k) plans?

Call us at 1-877-493-4727

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