|
The Individual 401(k) Retirement Plan allows one-person business owners (and their working spouse) the opportunity to save more for retirement. Current tax rules allow tax-deductible profit sharing and salary reduction contributions (and after-tax Roth plan contributions if allowed by the plan) of up to $51,000 for tax year 2013 ($50,000 in 2012). In 2012 and 2013, individuals age 50 or older can contribute up to an additional $5,500 in "catch up" contributions. |
 |
Note: The Individual 401(k) Plan is not appropriate for a business that has, or plans to add, any non-spouse employee who would be eligible to participate in the plan.
Individual 401(k) Retirement Plan Benefits at a Glance
- Significant Tax Savings Potential
- Is the Individual 401(k) Plan Your Best Retirement Savings Option?
- Valuable Benefits Targeted to Small Businesses
- Low Costs
Making profit sharing and before-tax salary reduction contributions to an Individual 401(k) Plan can help reduce your taxable income while saving for retirement.
- The example below shows how an unincorporated small business owner with $100,000 in income can save as much as $5,400 in taxes.1
- Before-tax profit sharing and salary reduction contributions made for retirement are generally deductible as a business expense.
| Without an Individual 401(k) Plan |
With an Individual 401(k) Plan |
|
| Net Business Income | $100,000 | $100,000 |
| Less: Net itemized deductions, ½ Self-Employment Tax and Four Exemptions | 34,865 | 34,865 |
| Less: Before-Tax Contributions | 0 | 36,087 |
| Taxable Income | 65,135 | 29,048 |
| Regular Tax Due | 8,8785 | 3,465 |
| Self-Employment Tax Due | 14,130 | 14,130 |
| Total Tax | 23,007 | 17,594 |
| Tax Savings | $0 | $5,413 |
If you are self-employed or run a small business with no employees other than your spouse and you have no plans to add employees in the future, the Individual 401(k) Retirement Plan may work best if you are:
- Under age 50 with net business income of less than $239,600 (or W-2 wages under $184,400), or
- Age 50 or older and able to make "catch-up" contributions in addition to your salary deferral contributions.
The chart below is a quick reference to help determine if the Individual 401(k) Retirement Plan is suited to your retirement needs:
| Maximum Individual 401(k) Contributions | ||
| Maximum Individual 401(k) Contribution, Unincorporated Business | ||
| Net Business Profit | Investors Under Age 50 | Investors Age 50 or Older in 2013 Making Catch-up Contributions |
| $25,000 | $22,147 | $23,088 |
| $50,000 | $26,794 | $32,294 |
| $75,000 | $31,440 | $36,940 |
| $100,000 | $36,087 | $41,587 |
| $125,000 | $40,755 | $46,255 |
| $150,000 | $45,688 | $51,188 |
| $200,000 | $51,000 | $56,500 |
| Maximum Individual 401(k) Contribution, Incorporated Business | ||
| Net Business Profit | Investors Under Age 50 | Investors Age 50 or Older in 2013 Making Catch-up Contributions |
| $25,000 | $23,750 | $25,000 |
| $50,000 | $30,000 | $35,500 |
| $75,000 | $36,250 | $47,750 |
| $100,000 | $42,500 | $48,000 |
| $125,000 | $48,750 | $54,250 |
| $150,000 | $51,000 | $56,500 |
| $200,000 | $51,000 | $56,500 |
The maximum amount of earned income that can be used in determining your contribution is $255,000 in 2013. The maximum deductible plan contribution is 25% of compensation plus salary deferrals. Combined employer and salary deferral contributions are limited to the lesser of 100% of the participant's compensation or $51,000 for investors under age 50 and $56,500 for those age 50 and over in 2013.
| Maximum Individual 401(k) Contributions | ||
| Maximum Individual 401(k) Contribution, Unincorporated Business | ||
| Net Business Profit | Investors Under Age 50 | Investors Age 50 or Older in 2012 Making Catch-up Contributions |
| $25,000 | $21,647 | $23,088 |
| $50,000 | $26,294 | $31,794 |
| $75,000 | $30,940 | $36,440 |
| $100,000 | $35,587 | $41,087 |
| $125,000 | $40,300 | $45,800 |
| $150,000 | $45,233 | $50,733 |
| $200,000 | $50,000 | $55,500 |
| Maximum Individual 401(k) Contribution, Incorporated Business | ||
| Net Business Profit | Investors Under Age 50 | Investors Age 50 or Older in 2012 Making Catch-up Contributions |
| $25,000 | $23,250 | $25,000 |
| $50,000 | $29,500 | $35,000 |
| $75,000 | $35,750 | $41,250 |
| $100,000 | $42,000 | $47,500 |
| $125,000 | $48,250 | $53,750 |
| $150,000 | $50,000 | $55,500 |
| $200,000 | $50,000 | $55,500 |
The maximum amount of earned income that can be used in determining your contribution is $250,000 in 2012. The maximum deductible plan contribution is 25% of compensation plus salary deferrals. Combined employer and salary deferral contributions are limited to the lesser of 100% of the participant's compensation or $50,000 for investors under age 50 and $55,500 for those age 50 and over in 2012.
T. Rowe Price can help you take a big step toward a comfortable retirement with:
- Tax-deferred growth potential of your investments: With profit sharing and before-tax salary reduction contributions, you reduce your taxable income now and get the potential for tax-deferred growth on your investments. You don't pay taxes on any of your earnings until you withdraw them―usually during retirement.
- Tax-free earnings: If allowed by your plan, with after-tax Roth plan contributions, you forgo the advantage of pretax salary reduction contributions now. Later, in retirement, you may potentially maximize your spendable income with tax-free qualified distributions of contributions and earnings.2
- Generous contribution limits: Each year, you can contribute up to 25% of your compensation to your Individual 401(k) Plan. On top of that, you can add more in salary deferrals. These salary deferral contribution limits apply if you are making before-tax salary reduction contributions, Roth plan contributions, or both to your Individual 401(k) account. Total contributions for tax year 2013 cannot exceed the lesser of 100% for participants compensation or $51,000 ($50,000 in 2012) per participant if under age 50 and $56,500 if age 50 or older in 2013 ($55,500 in 2012). The maximum amount of a participant's compensation can be used determine the plan contribution is $255,000 for 2013 ($250,000 in 2012).
| 2012 | 2013 | |
| Maximum Standard Elective Deferral3 | $17,000 | $17,500 |
| Catch-Up Contribution | $5,500 | $5,500 |
| Total For Those Age 50 or Older | $22,5004 | $23,0004 |
3If allowed by the Individual 401(k) Plan, the maximum standard elective deferral limit can be any combination of before-tax salary reduction and Roth plan contributions.
4Indexed periodically for inflation. The limit applies to total salary deferrals made by an individual each year to employer-sponsored plan(s).
- There are no commissions or plan setup costs.
- Choose from over 80 no-load mutual funds.
- We keep our mutual fund expenses low to help you save even more.
- An annual $20 account service fee is charged for each mutual fund account with a balance below $10,000. The $20 account service fee will be waived for the following circumstances: Subscribe to electronic delivery of statements and confirmations*; maintain an individual combined balance of $50,000 or more for all T. Rowe Price accounts (including mutual funds, Brokerage, Variable Annuity, and Small Business Retirement Plans); or qualify for T. Rowe Price Select Client Services based on higher asset levels of $100,000 or more.
- If the Participant Account is closed during the year, a $20 closeout fee will be deducted automatically from the proceeds of the total redemption. However, the closeout fee is waived when an account service fee was previously assessed to the participant account for that year or when the proceeds are being used for a rollover, transfer or conversion to a T. Rowe Price retirement plan account or T. Rowe Price IRA.
Feedback
