Owner-only 401(k)s help small-business owners with retirement savings needs

If you own a small business and think 401(k) plans are just for large corporations, you may be missing a great opportunity when it comes to retirement planning. Owner-only 401(k)s are a relatively new way for small-business owners to save for retirement and enjoy some of the same benefits of a regular 401(k), such as high contribution limits.

Current tax laws may make a 401(k) particularly attractive if a business is the primary source of income and you are not a participant in another employer’s retirement plan that allows for payroll deductions.

Here’s a look at some of the most frequently asked questions about these plans.

• What is an owner-only 401(k)?

An owner-only 401(k) is purely a 401(k) plan that is priced to be cost-effective for small businesses. Any type of small business can participate as long as there are no eligible employees except for the owner(s) of the business and their spouse(s). Sole-proprietorships, partnerships, S-corps and C-corps are a few of the types of small businesses that may be eligible for participation in an owner-only 401(k).

• How much can I contribute to an owner-only 401(k) per year?

As an employee, you can contribute a maximum of $13,000 from your salary through deferrals. In addition, the employer – or company – can make contributions to your account, but these cannot exceed a maximum of 25 percent of the total eligible payroll. The combination of the employee salary deferral contribution and the employer contribution cannot exceed a maximum of $41,000, or the amount of the employee’s salary if less than $41,000.

Also, individuals age 50 or older may contribute an additional $3,000 in salary deferrals to their accounts. Keep in mind, this “catch-up” contribution does not count toward the $41,000.

• What are some of the tax advantages of this type of plan?

Contributions to an owner-only 401(k) are 100 percent tax deductible and accumulate tax-deferred until withdrawn. This gives the money the potential to compound over the years without being taxed.

• Can I change the amount I contribute to the plan?

Yes, with an owner-only 401(k) you’ll have complete contribution flexibility. Contribution amounts are completely discretionary and can be changed or stopped anytime.

• What if I already have another type of retirement plan I’ve been funding?

If you have assets in another type of employer-sponsored retirement plan, such as a SEP-IRA, or in an individual IRA, you are able to roll those assets into an owner-only 401(k). You should make sure that the type of plan you’re looking into allows rollovers.

• Is this plan complicated to establish?

No, owner-only 401(k)s are hassle-free. The plan requires minimal paperwork and doesn’t cost much to establish.

The owner-only 401(k) may be just another tool that can help you save for retirement. A financial consultant can assist you in determining the best plan for your particular situation. The important thing is to start saving for retirement today.