Thanks to the Economic Growth and Tax Relief Reconciliation Act of 2001, small businesses - whose only employee is the owner or the owner and spouse - can open and contribute to a Self-employed 401K plan. Finally. A great tax break strictly geared to benefit the smallest business owners. On top of the tax break, the Self-employed 401K offers other benefits for cash-strapped small business owners.

Who can Establish this type of plan ?

Any single business owner, an independent contractor with 1099 income, freelancer, sole proprietor, or in a partnership, Limited Liability Company (LLC) or corporation, can tap into the full benefits of the Self-employed 401K.


History

Prior to 2002, the employer Profit Sharing Plan contribution deduction limit was 15% of eligible compensation, the individual plan contribution allocation limit was the lesser of 25% of compensation or $35,000 and the compensation limit considered in determining the employer maximum deduction and the individual contribution allocation was  $170,000. Spouses working for  family owned businesses were oftentimes not compensated due to the 15.3% cost associated with the Social Security and Medicare taxes (FICA), and a previously repealed pension law that limited plan contributions if a spouse was included in the plan.


The Present and The Future

Starting in 2002, the revised pension law provides the following:

An employer has the discretion to contribute and deduct from 0-25% of eligible employee compensation to a Profit Sharing Plan.

The individual compensation limit increases to $205,000.

The individual contribution allocation limit increases to the lesser of 100% of compensation or $41,000.

The 100% of compensation or $13,000 individual 401(k) contribution limit is not considered in determining the employer 25% deduction limit.

The $3,000 401(k) "Catch-up" contribution  for individual over 50. deduction limit.