Individual 401(k) Plans

Written by True Tamplin, BSc, CEPF® | Reviewed by Editorial Team

Updated on December 13, 2022

There is only one kind of individual 401(k) plan in existence today. An Individual 401(k) plan is available to self-employed individuals and business owners, including sole proprietors, corporations, partnerships, and tax-exempt organizations with no employees other than a spouse. You must have a minimum 5% business share to be eligible.

Self-Employed 401(k) Plan

If you are self-employed or own a business of one of the types described above and would like to make a substantial contribution for your retirement, then this plan is for you.

In 2020, you can make an elective salary deferral of up to $19,500 and then make an employer-funded contribution of 20% of your self-employment income up to $57,000 for a total of $76,500. If you are age 50 or above, then you can make an additional catch-up contribution of $6,500 to bring your total contributions to $83,000. And these numbers are expected to rise as time passes.

Self-Employed 401(k) Contribution Limit

In order to figure out the amount of money that you can put into your self-employed 401(k) plan in a given year, you must first determine the total amount of your "earned income" for that year. This figure is equal to your net earnings from self-employment minus half of your self-employment tax and the contributions to the plan that you made for yourself.

Use the rate table or worksheets in Chapter 5 of IRS Publication 560, Retirement Plans for Small Business, for figuring your allowable contribution rate and tax deduction for your 401(k) plan contributions.

Individual 401(k) Investments

You can invest your plan in a wide range of investment options, including mutual funds, annuities, stocks, bonds, CDs, guaranteed investment contracts, and other assorted vehicles designed to grow in value over time. Virtually all investment firms, brokers, banks and insurance companies can help you to administrate this type of plan and keep record-keeping and other paperwork to a minimum.

The investment firm or bank that you choose to help you administrate your plan will also act as your plan's custodian and thus invest your contributions according to your specifications. The investment firm will also hold your contributions for safekeeping.

Individual 401(k) Plan Requirements

You are not required to contribute to the plan every year; if your income is low in a given year, then you can pass on your contributions for that year if necessary. If you hire any employees who qualify to participate in the 401(k) plan, you must make this available to them. But the plan will then have to meet the top-heavy and nondiscrimination tests that apply to all 401(k) plans with more than one participant.

Individual 401(k) Plans FAQs

What is a 401(k) plan?

A 401(k) plan is a retirement plan offered by an employer designed to help employees save for retirement.

What are individual 401(k) plans?

An Individual 401(k) plan is available to self-employed individuals and business owners, including sole proprietors, corporations, partnerships, and tax-exempt organizations with no employees other than a spouse.

What is the difference between a Roth 401(k) and traditional 401(k)?

With a Roth 401(k), taxes are paid as money is put into the retirement account. With a traditional 401(k), taxes are paid as money is taken out.

Are there other retirement savings plans other than a 401(k) plan?

Alternatives to 401(k) plans include traditional IRAs, Roth IRAs, pension plans (if your employer offers one), and 403(b) retirement plans for employees of non-profit organizations.

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.

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