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Individual 401k Plan

Several changes regarding Individual 401k plans have been implanted that only a little bit transformed the previous format to make it more attractive to small business owners. This was done in order to provide small business owners with more reasons to choose this type of retirement plan against the traditional ones. Before the pension reforms the small business owners could have achieved the same results by allocating money to a profit sharing or saving purchase plan, which even were less expensive to open and operate. The pension reforms increased the popularity of Individual 401 (k) plans by providing more opportunities for maximizing retirement savings.

Some of the major changes on the Individual 401k done under the recent pension reforms include:

Changes on the Deductibility

The recent pension reforms made the following improvements:

  1. In order to determine the maximum deductible contribution, deferrals no longer should be added to profit sharing contributions.
  2. Individuals can contribute up to 25% to a profit sharing plan. This amount is deducted from the income.

Individuals were not stimulated to add a 401k component to their profit sharing plan, since they could contribute 15% of compensation without the inclusion of a 401k feature. Additionally, under the old laws the operation expenses were much higher. Many case of reduction of the maximum amount allowed to be contributed were observed by the implementation of deferrals.

Under the new pension regulations the cost of operating an Individual 401k is significantly reduced. Additionally, individuals enjoy the opportunity of making higher contributions to their Individual 401k plan as compared to a profit sharing plan, which doesn't include a 401k feature.

Annual Contribution Limits

By law you are not allowed to exceed certain limits as regards the contributions you can make. These limits are presented in Section 415 of the IRC. The limit includes such considerations as annual contributions to an individual's account and the corresponding:

  • Forfeitures
  • Deferrals
  • Profit sharing contributions

For 2001, the maximum amount that can be contributed to a 401k plan was no more than 25% of the compensation or $30,000. Due to the 15% of compensation limits in 2001 and the compensation cap of $170,000, an individual could not possibly save more than $25,000. On the other hand, a participant in an Individual 401 (k) can benefit from a $45,000 maximum contribution if s/he is under the age of 50, or $50,000 if s/he is over the age of 50. This is accomplished through a W-2 compensation of at least $118,000.

For 2007, the maximum amount that can be contributed to an Individual 401k was not more than 100% or $45,000. An exception is made for those individuals, who are above the age of 50. In this case they can contribute up to $50,000 each year.

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