Sal Favarolo - Private Wealth Advisor with Lantern Wealth Announces 5 Tips & Benefits of a One-Participant 401(k) Plan for Self-Employed Individuals

Share Article

Small business owners, sole proprietors, and self-employed individuals interested in saving more for retirement while reducing their federal income tax liability, the One-Participant 401(k) Plan offers many income tax and savings benefits. Here are some tips when selecting a small business retirement plan.

Benjamin Franklin’s 1789 quote still holds true today: “In this world nothing can be said to be certain, except death and taxes.” Sal Favarolo, Senior Vice President at Lantern Wealth, says, "If you didn’t implement aggressive tax strategies last year, you might have faced significant tax liability for 2014".

When discussing retirement savings with small business owner clients, Sal Favarolo asks "If you answer 'yes' to the three questions below, there may be a proactive path to avoiding similar pain for the 2015 tax year:

1. Are you interested in boosting your retirement savings?
2. Have you paid or do you owe a high amount of 2014 income tax?    
3. Are you self-employed with no full time employees, other than a spouse? "

According to Mr. Favarolo, the One-Participant 401(k) plan, often overlooked (by both sole-owners and their CPAs / tax advisors) may allow self-employed small business owners to shelter more income, save more on income taxes, and help build-up retirement nest eggs more quickly than commonly used plans like the SEP, Profit Sharing, or Simple Plans.

A One-Participant 401(k) plan is a conventional 401(k) / profit sharing plan but designed especially for small business owners. It can provide self-employed individuals numerous and substantial benefits not generally available through the more well-known small business retirement plans. It has been designed exclusively for owner-only businesses and small businesses which can exclude certain employees. The One-Participant 401(k) plan is designed to maximize contributions while being less complex and less costly to maintain than the conventional 401(k) plan. According to Sal Favarolo, five benefits the One-Participant 401(k) plan can offer a sole proprietor or self-employed individual are as follows:

1. Higher Contributions Levels:

One of the major advantages of a One Participant 401(k) is the allowable amount of deferred W2 income, compared to other small business retirement plans commonly implemented, like the SEP, Profit Sharing, or a Simple plan, especially when wages are less than $200,000. The higher contribution levels are the result of an employee salary deferral and a company Profit Sharing contribution. The sole owner of a business wears two hats in a 401(k) plan: employee and employer. For 2015, the maximum salary deferral is $18,000 or $24,000 if age 50 or over. Additionally, the company can make an employer non-elective contribution up to 25% of compensation. Total contributions into the plan are capped at the lesser of $53,000, not including the catch-up, or up to 100% of compensation.

Sal Favarolo discusses the following scenario. Using $100K compensation, the chart below illustrates how a self-employed person can shelter up to $43,000 of income in 2015, compared to $25K with a Profit Sharing or SEP IRA, and $15.5K in a Simple Plan.

EXAMPLE - (Source Ascenus ) Corporation – 2015 tax table – Participants are younger than 50 years of age - Maximum plan contributions include both salary deferral and employer discretionary contributions.

Projected 2015 W-2 Wages ......................................$100,000.00
One Participant 401(k) Plan ......................................$ 43,000.00
Profit Sharing/Money Purchase Pension Plan ..........$ 25,000.00
SEP Plan ....................................................................$ 25,000.00
SIMPLE IRA Plan .......................................................$ 15,500.00

2. Adding a Spouse to the Plan.

Another advantage of the One-Participant 401(k) is the Certified Public Accountant (CPA) can optimize W-2 compensation and possibly lower the client's Federal Insurance Contribution Act (FICA) taxes, while contributing more to the retirement plan relative to the given level of compensation. Sal Favarolo says his CPA clients absolutely love this advantage as they can show their small business clients significant tax savings. This W-2 compensation optimization can be especially beneficial when adding a spouse to the company retirement plan.

Projected 2015 W-2 Wages ..........................................$25,000.00
One Participant 401(k) Plan ......................................$24,250.00
Profit Sharing/Money Purchase Pension Plan ..........$ 6,250.00
SEP Plan ....................................................................$ 6,250.00
SIMPLE IRA Plan .......................................................$13,250.00

Sal Favarolo says many small business clients would like to add their spouse to the plan, but wish to avoid committing to a high W2 salary in order to benefit from higher retirement savings. A spouse receiving minimal compensation may contribute nearly all his/her compensation into the One-Participant 401(k) plan. Achieving a similarly high contribution amount in other plans would require the spouse to receive significantly higher compensation, which would entail higher Federal Insurance Contribution Act (FICA) taxes.

3. Catch-Up Provision

While SEP plans do not allow catch-up provisions for employees at least 50 years of age, the One-Participant 401(k) plan does allow them for even greater retirement nest egg building. For 2015, the catch-up provision would allow the 401(k) participant [age 50 or older], to sock away an additional $6,000 into the One-Participant 401(k).

4. Simple To Set-Up

Sal Favarolo says One-Participant 401(k) plans are simple to set-up. While one does have to adopt a plan document, tax filings like the 5500 generally do not have to be filed until plan assets are greater than $250,000. Typical costs to set one up can range from zero - $250.

5. Flexibility in Contributions

Elective salary deferrals often vary from year to year depending on business cash flow. Sal Favarolo notes that if the self-employed individual is looking to save more than $53,000 per year, the One-Participant 401(k) can be combined with a small business defined benefit plan, where it is possible to save $200K or more per year, depending on W2 compensation and cash flow.

According to Lantern Wealth's Sal Favarolo, the One-Participant 401(k) can be a highly effective retirement plan for sole business owners, self-employed individuals, and independent consultants. One-Participant 401(k) plans need to be setup prior to the fiscal year-end. If the business is incorporated and the owner draws a regular salary, salary deferrals must be made prospectively. In other words, one cannot defer compensation that has been already paid. For this reason, it’s best to open the plan as early as possible in the year to allow the self-employed individual to defer more income. If the business is structured as a sole proprietorship, timing isn’t as important, since the sole proprietor isn’t deemed to receive compensation until the last day of the fiscal year according to the Internal Revenue Service. Sal Favarolo suggests as with any tax strategy, business owners should always consult with their CPA or tax advisor prior to implementation. Mr. Favarolo makes this a standard practice when working with small business owners and setting up small business retirement plans such as the One-Participant 401(k).

Sal Favarolo is a Private Wealth / Financial Advisor with Lantern Wealth Advisors, a boutique wealth management firm that educates and guides multi-generational clients to achieve their financial goals by managing risk, growing assets and preserving wealth. Sal Favarolo works with small business owners, self-employed individuals, sole-proprietors, and Certified Public Accountants (CPAs) to implement small business retirement strategies.

Share article on social media or email:

View article via:

Pdf Print

Contact Author

Sal Favarolo
@LanternWealth
since: 12/2011
Follow >
Visit website