Individual 401(k) FAQs

You can make profit sharing, before-tax salary reduction, and, if allowed by your plan, after-tax Roth plan contributions to your Individual 401(k) account up to $49,000 per participant for investors under age 50 in 2009 ($46,000 in 2008) and $54,500 for investors age 50 or older in 2009 ($51,000 in 2008). In addition:

• The money contributed before tax in your Individual 401(k) account generally is deductible as a business expense and grows tax-deferred until withdrawal, usually during retirement.
• If allowed by your plan, Roth plan contributions can help you avoid taxes on earnings with qualified distributions* and can potentially maximize your spendable income in retirement.
• Setting up a T. Rowe Price Individual 401(k) Plan is free.
• You can choose from more than 70 low-cost T. Rowe Price mutual funds with no loads or sales commissions.

Unlike before-tax salary reduction contributions, Roth plan contributions are made with after-tax dollars, or money you’ve already paid taxes on. This means that your Roth contributions are included in the amount that you report to the IRS as taxable income. Like before-tax salary reduction contributions, Roth plan contributions are automatically deducted from your pay (or income for unincorporated individuals). When you make Roth plan contributions, however, the amount of your take-home pay will be less than when you make before-tax salary reduction contributions.

The good news is that the balance of your Roth plan contributions and any earnings are not taxed when you take a qualified distribution*―generally in retirement. In fact, Roth plan contributions can help you avoid taxes on earnings. The bottom line: You can potentially maximize your spendable income in retirement, even if it means giving up before-tax advantages now.

To start an Individual 401(k) Plan for your business, you can download the necessary forms using the link below. For questions and assistance in completing the forms, or to discuss your options, call a T. Rowe Price Small Business Retirement Specialist at 1-800-638-3804. You can also request that an Individual 401(k) Plan kit be sent to your home or business.

Self-employed individuals and small businesses with no eligible employees other than the owner (and spouse). This includes:

• Sole proprietors
• Spouse-only partnerships
• Corporations (including “S” corporations)
• Individuals with self-employment income

The plan is not recommended for businesses that are planning to add non-spouse employees in the near future.

The Individual 401(k) Plan must be set up by your business’s fiscal year-end, generally December 31. Employer/profit sharing contributions can be made up until your business’s tax filing deadline (generally April 15), plus any extensions.

Salary deferral contributions can be made up until your business’s tax filing deadline (generally April 15 or March 15 for corporate entities), plus any extensions.

You can contribute up to 25% of compensation per participant to the Individual 401(k) Plan. On top of that, you can add up to $16,500 more in salary deferrals for tax year 2009 if you’re under age 50 ($22,000 if you’re age 50 or older in 2009). 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 cannot exceed $49,000 per participant under age 50 in 2009 ($54,500 for investors age 50 and over in 2009).

No. Each year, you decide if, and how much, to contribute to the plan. Use the Individual 401(k) Plan Salary Reduction Agreement to elect or change the amount you wish to withhold from your pay, and use the ACH Contribution Transmittal Form or the Individual 401(k) Plan Contribution Transmittal Form to remit contributions to your account.

T. Rowe Price charges no plan setup fees, loads, or sales commissions. There is a $10 annual administrative fee for each Individual 401(k) mutual fund account with a balance under $5,000. The fee is waived for shareholders with $50,000 or more, or households with $100,000 or more in total assets at T. Rowe Price. Assets held in a 529 plan, a plan that is part of the Century Program, or assets held in a plan that was/is recoredkept in the Retirement Plan Services Division of T. Rowe Price are not counted toward these limits. There is also a $10 closeout fee applied to an Individual 401(k) account that is closed at T. Rowe Price. The fee will be deducted automatically from the proceeds of the redemption from each mutual fund unless, at the time of redemption, the annual administrative fee for the year has been paid. The closeout fee applies regardless of the size of the mutual fund investments.

You are generally required to file IRS Form 5500 or Form 5500-EZ each year if the combined assets in all plans sponsored by the employer exceeds $250,000. T. Rowe Price provides information and instructions to help you complete the form.

There are advantages to both types of contributions. But, as the chart below shows, there are important differences. Deciding whether to make Roth plan contributions depends on your situation and should be based on several factors, including your age and tax rates now and as expected in retirement.