May 4, 2018

What is an Individual (K) Plan?

Diana Hoff
6 min

What is an IK account?

Unlike employer sponsored 401(K) plans, most people have never heard of an Individual (k) plan. An Individual 401(k) (or IK) works much the same as traditional 401(k) plans offered by large companies, and resemble the SEP IRA which is designed for the self-employed. However, an IK is designed strictly for sole proprietor business owners with no employees. The IK can be either a traditional and/or Roth version giving you the freedom to choose to either save money on a pretax basis where it can grow tax-deferred or, if you opt for the Roth version, save money post tax and have it grow potentially tax free.

Who can contribute to one?

An individual 401(k) is strictly for sole proprietors who have no employees (although your spouse may open one to contribute if he or she earns income from your business). If you are an employee of a company by day, and work your own home business in your off hours you may also qualify. But that can get thorny very quickly, so be sure to check with your CPA to be certain that you qualify.

Why is an individual 401(k)s a good idea?

These plans are ideal if you intend to save large sums of money. An IK allows you to save for retirement both as an employer and an employee, often enabling you to contribute more than would be possible with other retirement plans.

Here’s how: As an employee, you can stash away as much as $18,000. As the boss, you can contribute an additional 25% of compensation, up to a maximum of $53,000, including your employee contribution.

These contributions are optional and completely discretionary, so you can contribute up to the maximum in good years and during tough time you can hold off and contribute nothing at all.

Does an individual 401(k) make sense for me?

These plans are a good idea if:

You intend to contribute large sums.
– As much as $60,000 overall contribution in 2017 if you are over 50.
– As much as $54,000 overall contribution in 2017 if you are under 50.

If you want the capability of borrowing from your plan.
– You can take out an IK loan, which uses the balance of the account as collateral. You can borrow up to half of the total balance on your IK, as long as the loan doesn’t exceed $50,000.
– The remainder of your balance is still invested in your IK, with tax-deferred investment earnings growth, and you loan payment including interest are paid back to your IK.

To learn more about the advantages of an Individual (k), feel free to contact one of our experts.

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