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Higher Contributions May Be Available with an Individual 401(k) Plan for Your Business

An Individual 401(k) Plan Might be Right for You

Individual 401(k) is a term for a 401(k) designed specifically for owner-only businesses. The business owner may have the potential to contribute greater amounts to this type of plan than other business retirement plan options. Employer contributions are tax-deductible to the business. Employee salary deferrals can be pre-tax contributions (excluded from income for federal income tax purposes) or Roth contributions (after-tax contributions and qualified distributions can be tax and penalty free).

  • Sole proprietorships, partnerships, limited liability companies (LLCs), or incorporated businesses, including subchapter S corporations, may establish an Individual 401(k) plan.footnote 1
  • Designed for businesses in which there are no common-law employees or the only employee is the owner's spouse.
  • Union employees and non-resident aliens who have no U.S. source of income may generally be excluded from coverage.
  • All plan contributions are 100% vested immediately.
  • The deadline to establish an Individual 401(k) is the last day of the fiscal year for the business.
  • Any investment earnings grow tax deferred until withdrawn.
  • Generally, a 10% tax penalty on distributions applies to participants under age 59½. Participants will have to pay federal income tax on the distributions.

  • Designated Roth Contributions are allowed.
  • The owner(s) may make salary deferral contributions of up to $19,500 in 2021 ($26,000 for age 50 and over), either excluded from federal income tax or as Designated Roth Contributions.
  • Contributions are flexible and no annual contribution is required.
  • The owner-employee may be able to contribute more to an Individual 401(k) than other types of retirement plans.
  • The Individual 401(k) plan offers lower administration fees than a traditional or Safe Harbor 401(k) or a profit-sharing plan.
  • If employed and compensated by the business, the business owner's spouse may also participate in the Individual 401(k).
  • Non-discrimination testing is not required.
  • No annual reporting is required until assets reach $250,000; after that, Form 5500 EZ is filed.

return to reference1 Available only for spousal owners; product not available if business includes non-spousal owners.

Securities distributed by State Farm® VP Management Corp.

Securities are not FDIC insured, are not bank guaranteed and are subject to investment risk, including possible loss of principal.

Neither State Farm® nor its agents provide tax or legal advice.