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NOW IS THE TIME TO TAKE FULL ADVANTAGE!

ONE-PERSON 401(k) PLANS

Even though the SEP limit increased to 25%, sole-proprietors should still consider replacing their SEP-IRA with a one-person 401(k) plan. In order to contribute the $53,000 maximum to a SEP-IRA for the 2016 year, a sole-proprietor must have net self-employment (s/e) earnings of at least $212,000. Conversely, a sole-proprietor only needs net s/e earnings of $140,000 in order to contribute $53,000 to a 401(k) Plan. Following is a comparison of contribution amounts at various net earnings amounts:

Maximum contribution & deduction:
Net Earnings: 50,000 100,000 140,000 212,000
SEP-IRA 12,500 25,000 35,000 53,000
401(k) Plan 30,500 43,000 53,000 53,000
$ difference 18,000 18,000 18,000 0
% difference 144% 72% 51% 0%
Individuals age 50 or older may defer an additional $5,500 401(k) catch-up contribution on top of the amounts shown above. For example, a maximum of $57,500 instead of $52,000.

DEFINED BENEFIT PENSION AND 401(k) PLANS

401(k) deferrals are not considered for determining deductible limits. This allows employers with rich defined benefit (DB) plans to institute 401(k) plans. For example, a sole-proprietor (with no employees) with a DB plan could establish a 401(k) plan and defer $17,500 into the plan in 2014, plus a catch-up contribution of $5,500, if age 50 or older. This would be in addition to the required DB contribution for 2014.



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