The Self-Employed 401(k): Your Questions Answered

Q: What do I have to do to set one up?
Q: Can I roll an old 401(k) into my new self-employed 401(k)?
Various Readers

A: I've been getting a few questions about these types of plans, so I figured I would go into them in a little more detail.  The best way to do this would seem to be a FAQ...

1. What is a self-employed 401(k) plan?

A self-employed 401(k) plan is a 401(k) that is set up by owner-only (plus spouse) small businesses.  Any type of business can open up these plans, provided the only employee is the owner (plus his spouse).  Corporations, S-corporations, sole proprietorships, partnerships, and LLCs taxed as any of the above are eligible.

2. How much can I contribute?

There are several limits involved here.  The first thing to understand is that the general elective deferral limit ($15,500 in 2007 and 2008) applies for all salary deferral arrangements (plus $5000 catch-up if over age 50).  If you have another 401(k) plan, the deferral limit must be coordinated between the two.

Because the self-employed person is both the employer and the employee, he can also make an employer contribution.  This limit is 25% of compensation (salary).  In the case of self-employed people (who don't have salaries), the limit is 20% of net income from self-employment.

Finally, there is an overall limit for both of those parts.  This overall limit is the lesser of 100% of qualifying income or $45,000 ($46,000 in 2008).  The $5000 catch-up contribution is on top of this limit, but still subject to the 100% of income rule.  Like the elective deferral limit, this overall contribution limit must be coordinated among all plans that you are involved in.

3. When is the deadline for making contributions?

The plan must be set up before the end of the tax year.  The deadline for making the "employer" contribution is the filing deadline (April 15th for sole proprietors and partners, March 15th for corporations and S-corporations).  The deadline for making the elective deferral contributions are the end of the tax year for S-corporations and corporations, and April 15th for partnerships and sole proprietorships.

4. Can I roll my old 401(k) plan into my self-employed 401(k)?

Yes.

5. Are there any reporting requirements involved?

Not until plan assets hit $250,000.  After that, you will have to file a Form 5500 or Form 5500-EZ.

6. What can I invest in?

Anything that your plan administrator (I think Fidelity has a nice one myself) allows you to.  The usual suspects--mutual funds, ETFs, stocks, bonds, cash, etc.--are the norm.

Comments

[Will]

Your timing of this post could not have been better.... I was going to research this topic this week.

Thanks!!

[J Hall]

If your spouse works and their employer contributes, does that amount count as part of the $15,500?