What makes an individual 401(k) plan attractive?

What makes an individual 401(k) plan attractive?

One feature that makes an individual 401k plan an attractive retirement savings vehicle is that in most cases your allowable 401k contributions to an individual 401k plan will be as large or larger than you could make under another type of retirement plan.

• With an individual 401k plan you can elect to defer up to $15,500 of your compensation to the plan for 2008 ($20,500 if you are age 50 or older by the end of the calendar year), just as you could with any 401(k) plan.

• In addition, as with a traditional profit-sharing plan, your business can make a maximum tax-deductible contribution to the plan of up to 25 percent of your compensation.

  Because the amount of compensation deferred as part of a 401(k) plan does not count toward the 25 percent limit, you, as an owner-employee, can defer the maximum amount of compensation under the 401(k) plan, and still contribute up to 25 percent of total compensation to the profit-sharing plan on your own behalf.

• Total plan 401k contributions for 2008 cannot, however, exceed the lesser of $46,000 or 100 percent of your compensation (plus any catch-up 401k contributions if you're 50 or older).

• These 401k contributions possibilities aren't unique to individual 401(k) plans; any business establishing a regular 401(k) plan and a profit-sharing plan could make similar contributions. But individual 401k plan are simpler to administer than other types of retirement plans.

• Since they cover only a self-employed individual or business owner and his or her spouse.

  Individual 401k plan are not subject to the often burdensome and complicated administrative rules and discrimination testing that are generally required for regular 401(k) and profit-sharing plans.

Growth and Tax Relief Reconciliation Act of 2001 (2001 Tax Act), 401k contributions had to be counted toward the business's maximum profit-sharing contribution (which was itself limited to 15 percent).