Are you the sole owner and employee of a business? Do you want to maximize tax-deductible retirement savings? You may be eligible for a one-participant retirement plan, which covers an owner, or an owner and spouse, in a business with no other employees. As such the plan is not subject to nondiscrimination testing and has limited reporting requirements that make the plan very cost effective.
An Individual 401(k) Plan, or I-401(k), allows you to contribute up to $19,500 in 2021. You may also fund a profit sharing contribution up to 25% of compensation. However, the combined 401(k) and profit sharing amounts may not exceed $58,000. An additional 401(k) “catch up” contribution up to $6,500 may be funded if you are at least age 50. Maximum amounts for 2021 are:
- $58,000 for those under age 50
- $64,500 for those at least age 50
An Individual Defined Benefit Pension Plan allows for significantly greater contributions than an I-401(k) Plan. An actuary determines the required annual contributions to a defined benefit plan based on the amount necessary to fund a predetermined future benefit. Your compensation and years of service to the defined retirement age are critical variables in determining maximum deductible contributions, estimated as follows:
- $162,000 at age 50
- $208,000 at age 55
- $267,000 at age 60
- $277,000 at age 65
Combining a 401(k) and Defined Benefit Pension Plan allows for greater flexibility and maximum deductible contributions, estimated as follows:
- $205,400 at age 50
- $251,400 at age 55
- $310,400 at age 60
- $320,400 at age 65
If you are a sole proprietor, the compensation amount used to determine plan contributions is equal to your Net Earnings from Self-Employment, before plan contributions and taxes. The maximum compensation limit for 2021 is $290,000.
RTD Financial has trusted partner relationships with several firms that provide Third Party Administration and Actuarial services. We will work closely with you and your accountant to determine if a defined benefit plan is the right fit for your business. Then we will assess the level of retirement plan services required and help you select an actuarial firm best suited to your needs. We will act as a liaison to the actuary to obtain the required plan documents and determine your annual funding requirements. Our team will establish an investment policy appropriate for the plan, coordinate the annual deposits and invest plan assets to meet established goals.
Please contact your financial planning team or Beth Davies, Vice President of Retirement Plan Services, if you would like a complimentary retirement plan analysis for your business.