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Sole Proprietor 401k

The “sole proprietor 401k” is a term that may be used to refer to the Individual 401k. The Individual 401k is a 401k plan that is available to sole proprietorships.  Sole proprietors are eligible for an Individual 401k provided they have no W-2 employees (other than a spouse) who work more than 1,000 hours per year.

Individual 401k plans were developed due to the passage of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) that went into effect January 1st, 2002. The new law made several changes to the existing rules of 401k plans. These changes made the Individual 401k a very attractive retirement plan for sole proprietors. 

Simply stated there are 2 primary advantages of the Individual 401k versus other sole proprietor retirement plans

  1. Potentially greater retirement contributions at the same income level, therefore maximizing retirement contributions and valuable tax deductions.
  2. The option of a loan up to a maximum of $50,000 using your 401k balance as collateral for the loan.

401k Contribution Limits

The maximum Individual 401k contribution limit in 2015 is $53,000 or $59,000 if age 50+. Because of the way the contribution is calculated a larger contribution usually can be made into an Individual 401k than to a Keogh, SEP IRA or SIMPLE IRA at the same income level. Therefore the Individual 401k is usually the best sole proprietor retirement plan for maximizing retirement contributions and valuable tax deductions while reducing income taxes.

Individual 401k Loan

Another advantage of the Individual 401k versus other sole proprietor retirement plans is the ability to receive a loan using the balance of the 401k as collateral. Individual 401k loans are permitted up to 50% of the total balance of the 401k up to a maximum of $50,000. The proceeds from an Individual 401k loan can be used for any purpose, there are no income or credit qualifications to receive the loan and interest and principal are repaid to yourself. A loan from an Individual 401k is received tax free and penalty free. Loans are generally repaid monthly with a 5 year loan term. There are no penalties or taxes due provided loan payments are paid on time.

Learn more about the benefits of the Sole Proprietor 401k.


How Can BCM Help You?

Beacon Capital Management Advisors (BCM) is experienced in setting up retirement plans for our clients. BCM provides retirement plans to the self employed, freelancers, entrepreneurs, independent contractors and small business owners and is registered in 50 States. Complete the form below and a BCM Advisor will promptly respond to your inquiry.

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*The information on this page is for informational purposes only and does not constitute, and should not be construed as, professional, legal or tax advice. To determine your individual tax situation and specific needs, please consult a professional tax advisor.

*Information contained in these sections merely highlight some benefits. There are risks involved with all investments that could include tax penalties and risk/loss of principal.