401(k) Plans are not just for big businesses

Many small businesses are one person businesses. If this sounds like you, you might want to consider opting into a Solo 401(k) Plan. A Solo 401(k) plan is for a one-person business and may provide opportunities to increase your tax-deductible retirement plan contributions. If you’re considering establishing a SIMPLE or SEP Plan, a Solo 401(k) may be a better choice. Why? Typically, the 401(k) plan offers more features, like Roth deferrals and loans, than either the SEP or the SIMPLE IRA. It may also enable you to contribute more, maximize your tax-deductible contributions, and help you meet your long-range retirement goals.


Profit Sharing Plans and SEP Plans allow for flexible employer contributions up to 25% of participating payroll. While SIMPLE Plans do have a small, required employer contribution; the majority of plan contributions are from employee deferral contributions which are limited to $14,000 plus a $3,000 catch-up contribution for participants age 50 or older, as indexed for 2022. Since all 401(k) plans are profit sharing plans with a cash or deferred arrangement (CODA) allowing employees to contribute, or defer, a portion of their salary into the plan, in addition to the employer profit sharing contribution, you may make larger employer and an employee deferral contribution all in one plan.

If you’re a business owner with no employees and earning $100,000, you could set up a Profit-Sharing Plan or SEP Plan and make a maximum tax-deductible contribution of $25,000. However, since a plain Profit-Sharing Plan or a SEP Plan only allows for employer contributions, you may be limiting the amount of money that can be put aside for retirement, as well as the tax savings, with a plain profit-sharing plan or SEP Plan. By adding a 401(k)-deferral element to a Profit Sharing Plan, you may increase the amount you can contribute on a tax-deductible basis.


An existing profit-sharing plan may be easily amended to become a Profit Sharing/401(k) plan. In most cases, contributions previously made to a SIMPLE or SEP Plan, may be rolled over to a Profit Sharing/401(k) plan. Furthermore, there are no reporting requirements associated with a one participant plan or a one participant and spouse plan, until the plan assets total $250,000 or more. Even then, only a Form 5500EZ is required to be filed.

Another important benefit to establishing a Profit Sharing/401(k) Plan is that you may purchase life insurance on a tax-deductible basis through the Profit Sharing/401(k) Plan Trust as long as the premiums are within the incidental benefit limits. This isn’t allowed in a SIMPLE or SEP Plan as the funding vehicle is an IRA. Profit Sharing/401(k) plans also have special rules associated with life insurance limits not available in any other qualified plan, such as using rollover or seasoned money to buy life insurance in excess of the incidental rules.

Be sure to review your existing retirement plans with a financial professional to determine if these strategies are right for you.

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2021-130693 Exp. 12/2023

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