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Individual 401(k) plan.

Also referred to as a "Solo 401(k) Plan," the Individual 401(k) Plan is a regular 401(k) plan combined with a single-participant profit sharing plan (the name itself has been created by the marketplace, it is not found in the Code). Individual 401(k) Plans are limited to self-employed individuals or small business owners who have no other full-time employees (an exception allows coverage of both the self-employed individual or business owner and his or her spouse who is employed full time).

Individual 401(k) Plans can provide for increased retirement contributions without many of the complex administrative rules and nondiscrimination testing required of 401(k) plans and profit sharing plans covering multiple employees. (Should the sponsoring employer add additional employees to the plan, it is subject to the same minimum participation, coverage, nondiscrimination, and other requirements that apply to any other qualified defined contribution plan.) Other advantages include availability of loans, year-to-year contribution flexibility, availability of hardship withdrawals, rollovers from other retirement arrangements, and the ability to purchase permanent life insurance (see pages 457-458).

In 2009 and 2010, the Individual 401(k) Plan contribution limit is effectively the lesser of 100 percent of compensation or $49,000 ($54,500 if age 50 or over). Annual contributions to an Individual 401(k) Plan consist of two parts: a tax deductible salary deferral contribution plus an additional tax deductible profit sharing contribution.

Salary Deferral Contribution. In 2009 and 2010, 100 percent of compensation up to a maximum of $16,500, or $22,000 if age 50 or older ($16,500 plus $5,500 catch-up), can be contributed in salary deferrals. For S and C corporations compensation is based on W-2 wages. For businesses taxed as sole proprietorships and partnerships compensation is based on net earnings (net profit less the deduction taken for one-half of the self-employment tax).

Profit Sharing Contribution. For S and C corporations profit sharing contributions can be made up to 25 percent of W-2 wages. For sole proprietorships and partnerships profit sharing contributions can be made up to 20 percent of net earnings.

The sum of the salary deferral and profit sharing contributions cannot exceed the 2010 Individual 401(k) Plan contribution limit. For example, a self-employed individual age 45 (limit of $49,000) doing business as a sole proprietor and having $100,000 in net earnings can contribute $36,500 ($16,500 of salary deferrals plus 20 percent of $100,000 in net earnings). Likewise, a self-employed individual age 52 (limit of $54,500) doing business as an S corporation and having $100,000 in W-2 wages can contribute $47,000 ($22,000 of salary deferrals plus 25 percent of $100,000 in W-2 wages). Deferral contributions reduce taxable W-2 wages (or net earnings) and profit sharing contributions are generally tax deductible as a business expense. See also, simplified employee pension (SEP) on page 542.

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Title Annotation:Terms & Concepts
Publication:Field Guide to Estate, Employee, & Business Planning
Date:Jan 1, 2010
Previous Article:Income in respect of a decedent.
Next Article:Individual retirement arrangements (IRAs).

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