Article: Boost Your Retirement Savings with a One-Person 401(k)

March 2006

Boost your retirement savings with a one-person 401(k)

Do you want to boost your retirement savings by up to $44,000 a year? You should consider taking advantage of the generous contribution limits available through a One-Person 401(k) plan. Designed for businesses with no employees other than the owner and the owner’s spouse, One-Person 401(k) plans are a profit-sharing plan with a 401(k) feature. Whether you earn $10,000 or $10 million, this plan could be for you. Here are some of the benefits.

Generous contribution limits. As a result of the tax law changes in 2001, you may contribute up to $44,000 in 2006 to the plan in a combination of salary deferrals and profit sharing. Contributions are based on compensation (earned income if you are self-employed) and are structured in two components: salary deferral contributions and profit sharing contributions. The maximum salary deferral contribution for 2006 is $15,000 if under age 50, and $20,000 if age 50 or over. Profit-sharing contributions can also be made each year up to 25% of compensation. Combined salary deferral and profit-sharing contributions cannot exceed the lesser of 100% of compensation or $44,000 per person per year in 2006. You should also consider:

Flexibility. Neither salary deferrals nor profit sharing contributions are mandatory.
Vesting. You are 100% vested immediately.
Loans. Loans may be permitted, depending on the plan documents.

There are two basic contribution types:

Profit sharing (employer). The profit-sharing contribution, which can vary from year to year, can range from zero to 25% of compensation. Contributions must be made no later than the employer’s tax return due date, including extensions.
Salary deferral (employee). Salary deferral contributions can range from $0 to $15,000 for 2006. In addition, if the business owner is age 50 or older, he or she will qualify for an additional “catch-up” salary deferral contribution of $5,000 in 2006.

If you meet the criteria for a One-Person 401(k), your financial advisor can help you explore your options in the context of your overall financial goals. Talk to your financial advisor today for trusted advice on retirement planning.

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