Is your business a solo show? Learn about owner-only 401(k) plans

Is your
business a solo show? Learn about owner-only 401(k) plans

Business
Ownership

How to
determine if this retirement vehicle makes sense for you.

The
owner-only 401(k) is a retirement vehicle that gained a lot of momentum in 2001
when the IRS made it much more flexible for business owners. An owner-only
401(k) is a retirement savings account designed for those running a business as
the only employee, allowing contributions not just from your salary but also
your business. It’s a vehicle that offers many advantages – but you must meet
certain requirements to deploy it. Below is more insight into how owner-only
401(k) plans work.

How much
can I contribute?

An
owner-only 401(k) allows you to make a contribution both from your salary and
from your business. This allows you to maximize your retirement savings, reduce
your tax burden and catch up on contributions if you are over 50.

You can
designate up to 25% of your total compensation to a profit-sharing plan, plus
up to $23,500 to a 401(k) plan if you earn at least that amount annually. This
brings your total contribution level up to a maximum of $70,000, or 100% of
your total compensation, whichever is less.

If you are
50 or older, you can make an additional “catch-up” contribution of up to
$7,500.*

Choose
your tax advantage

Pick a
traditional 401(k) to reduce your income tax in the year your contributions are
made or go with a Roth option in the 401(k) if available, which doesn’t get you
an initial tax break but does allow you to withdraw the funds tax-free in
retirement, if certain conditions are met. If you think your income will be
higher in retirement, the Roth may be a good move. If you think it will be
lower, taking the tax break now may be right for you.

Spousal
benefits

While this
type of plan is specifically for businesses with no employees, you and your
spouse can participate if you both are employed by and receive compensation
from the business.

Other
advantages

The
owner-only 401(k) offers some administrative advantages over a regular
qualified retirement plan. Unless your balance exceeds $250,000, you do not
have to file a 5500 form every year with the IRS. You also do not need to
perform nondiscrimination testing, which is a compliance regulation from the
IRS that usually requires a plan administrator. And you may be able to take a
loan from your owner-only 401(k) of 50% of the account balance (greater than
$10,000) or $50,000 – whichever is less.

An
owner-only 401(k) also allows for consolidation of multiple accounts. Most
retirement plan assets, including funds from profit sharing and money-purchase
plans, and both traditional and SEP IRAs, can be transferred into your
owner-only 401(k).

Setting
it up

Give us a
call if you would like to learn more about setting up an owner-only 401(k).
You’ll need an employee identification number, and you’ll sign a plan adoption
agreement. Once it’s set up, you can start investing in vehicles like ETFs,
index funds, mutual funds and more – whichever make sense for your long-term
financial and retirement goals.

Pendle Hill
Advisors is proud to contribute to the Montgomery County News with our weekly
curated financial news and topics. If you have any questions about the markets,
your financial plan, or anything, please feel free to reach out to our office
for a no cost initial consultation.

Kent Pendleton, AAMS®

Financial Advisor, RJFS

Pendle Hill Advisors LLC

14375 Liberty St, Ste 109 | Montgomery,
TX 77356

T 936-297-8267

Kent.Pendleton@raymondjames.com | www.raymondjames.com/pendlehilladvisors

Material
created by Raymond James for use by its advisors. Securities offered
through Raymond James Financial Services, Inc. Member FINRA/SIPC. Investment
advisory services are offered through Raymond James Financial Services
Advisors, Inc. Pendle Hill Advisors is not registered broker dealers and is
independent of Raymond James Financial Services.

The
information has been obtained from sources considered to be reliable, but we do
not guarantee that the foregoing material is accurate or complete.
Raymond James does not provide advice on tax or legal issues. These matters
should be discussed with an appropriate professional.

401(k)
plans are long-term retirement savings vehicles. Withdrawal of pre-tax
contributions and/or earnings will be subject to ordinary income tax and, if
taken prior to age 59 1/2, may be subject to a 10% federal tax penalty.
Contributions to a Roth 401(k) are never tax deductible, but if certain
conditions are met, distributions will be completely income tax free.

*Under a
change made in SECURE 2.0, a higher catch-up contribution limit applies for
employees aged 60, 61, 62 and 63 who participate in these plans. For 2025, this
higher catch-up contribution limit is $11,250 instead of $7,500.