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One-Participant 401(k): A Tax-Exempt Option for the Self-Employed

If you’re an independent contractor or the owner of a small business with no full-time employees, there’s a retirement savings plan just for you. The IRS calls it a one-participant retirement plan; you may also hear it referred to as an Individual 401(k) or a Solo 401(k).

Benefit # 1: Lower Your Income Tax

It offers you the same opportunity to make tax-exempt contributions that regular employees get from their employer-administered 401(k) plans. That means you’ll be paying less income tax since you’ll subtract from your income however much money you contributed to the plan. 

Of course, you’ll have to pay tax on the distributions you take from the plan after you retire. If you’d rather have tax-free income in retirement when your earning power is reduced, we suggest you consider a Roth IRA in addition to or instead of the One-Participant 401(k).

Benefit # 2: Build Your Nest Egg Faster

Another benefit of the One-Participant 401(k) is that the maximum annual contribution is much higher than for IRAs. 

If you’re a business owner who functions as both an employee and an employer, you can contribute to the plan in both capacities.

As an employee, elective deferral up to 100% of earned income, for a maximum of:

  • $19,000 if under age 50
  • $25,000 if age 50 or older

As an employer, nonelective contributions up to 25% of compensation

For self-employed individuals, the contribution limit is computed based on your earned income after deducting 50% of your self-employment tax and contributions for yourself. See the IRS instructions for calculating your contribution.

Benefit # 3: Reduce Tax Hassles

Tax filing for a One-Participant 401(k) is super easy, too — you don’t even have to include a separate IRS form reporting the plan contributions or balance, with certain exceptions.

Those exceptions are: 

  • The total of the plan’s assets plus all your other one-participant plans exceeds $250,000 by December 31.
  • The plan was terminated during the tax year.

If your plan falls into one of those exceptions, you must file IRS Form 5500-EZ, which is just an information sheet that provides basic financial data. You still don’t owe any taxes.

Even if you’re not required to file Form 5500-EZ, there’s a good reason to do so anyway. You see, if you don’t file, the statute of limitations won’t be activated. Who knows what could happen in the future? That’s why we think it’s smart for everyone — exempt or not — to file the form and start that statute clock ticking down.

How to File Form 5500-EZ

The filing deadline is July 31.

Fill out and mail the paper Form 5500-EZ to
Department of the Treasury
Internal Revenue Service
Ogden, UT 84201-0020

If you are filing more than 250 returns of any type, you must file electronically through the EFAST2 Filing System, using Form 5500-SF instead of 5500-EZ.

At Xendoo, our mission is not only to give you financial peace of mind today while you run your business but also to help you rest easy that your future is in good shape. If you have any questions about the tax implications of your retirement plans, please give your Xendoo advisors a call.



This post is intended to be used for informational purposes only and does not constitute as legal, business, or tax advice. Please consult your attorney, business advisor, or tax advisor with respect to matters referenced in our content. Xendoo assumes no liability for any actions taken in reliance upon the information contained herein.


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