Monday, October 15, 2007

401 K’s are available for the one person business (Sole Proprietor, Corporation or LLC) and should be considered

This article was written by Dick Ginnaty, CPA

Since 2002 the big corporation benefit of the 401 K contribution has been available to the one person sole proprietorship, or single employee corporation, or single member LLC. For 2007, the maximum contribution to the plans including the Company’s portion (up to 25% of compensation) for those earning $50,000 is $24,794 for the self employed, and $28,000 for corporate owner/employees. If the person is over 50 then another $5,000 can be contributed. That’s a big contribution in anybodies language.

The plans have to be established before year end to qualify (employee contributions have to be deducted from their pay) but the employer contribution can be deferred until filing of the entity’s tax return.

Be aware that there are some administrative expenses which should be investigated before committing to the plan but they should be fairly nominal. Specifically, once the plan assets exceed $250,000 the plan has to file a tax return (a form 5500).

A couple of additional features of the 401K plan make it more appealing than some of the other retirement plan options (IRAs, or Simple IRAs). As a 401 K plan, you can rollover balances from other retirement plans to the 401 K and you can set up a “loan” option on the 401 K balance. Under the loan option, you can borrow up to $50,000 from your 401 K plan (limited to 50% of the balance in the plan).

Also, if you employ your spouse, further contributions can be made on their behalf.

The plan works for partnerships or multiple member LLCs or multiple shareholder corporations as long as all the “employees’ of the entity are the owners or owner’s spouses.

401K’s can be a big help in reducing your current tax bite, so keep them in mind.

Good luck and here’s hoping it “all adds up” for you.

(If there is any area in accounting or tax that you think needs to be addressed in this newsletter please e-mail Dick at and if it is of general interest, he will address it in future articles).