401(k) December Deadline: What small business owners need to know about the Individual 401(k) for saving on taxes and for retirement

By: Robert Castillo, ADPA®

It’s holiday season and even though most of us are in spending mode, it’s wise to consider financial planning strategies that could help wrap up the year with extra savings. If you are in a state like California or New York, like many of my clients, one of your biggest goals might be to get as many tax deductions as you can before the Tax Policy Reform passes. While a lot of the tax bill is still up for debate, what we do know is this: Deductions related to owning property and state income taxes may go away or be severely capped. Without the tax benefits of buying real estate or deducting state income taxes, many families will effectively pay more taxes despite the proposed lower tax brackets of the bill. For families that have one or both breadwinners who are self-employed or own a small business, your tax situation is more complex than most people so it is especially important to speak with your advisor to create a financial plan. For now, I’d like to share with you one of the best solutions for business owners to save on taxes, which is to establish a company retirement plan. There are various types of retirement plans available to corporations but given the approaching deadline of December 31st, I’d like to discuss the Individual 401(k) plan and how it can be used as a tool for potentially reducing your taxes and saving for your retirement.

Individual 401(k) plans, also known as Solo 401(k) plans, are appropriate if the business owner intends on saving the maximum deductible contribution that is allowed by the IRS, which is $54,000 in 2017 ($60,000 if you are age 50 and above). If you intend on saving lower amounts for retirement, then you might be better off opening a regular IRA account which has a maximum annual contribution of $5,500. With an Individual 401(k), you can contribute as both an employee and an owner. On the employee side, you can do a salary deferral of up to $18,000 if the annual salary is at least $18,000 (or $24,000 if you are age 50 and above). As the owner of your business, you can pay yourself a profit sharing contribution of up to $36,000 in 2017. The good thing about the Individual 401(k) is that you don’t have to make the contribution until you file taxes in April of the following year, you just need to make sure you get the account open by December 31st. Again, make sure to speak to your Financial Advisor about how to open an Individual 401(k) by the deadline.

Individual 401(k) plans are convenient for businesses with multiple owners because they allow each owner to benefit from tax-deductible contributions into the plan. The spouses of the owners may also contribute into the plan if they are receiving income from the business. In order to maintain the status of an Individual 401(k), however, all participants must hold at least 5% ownership in the company. Otherwise, the business will be required to use the traditional group 401(k) which would increase the costs of the plan through higher administrative fees and being required to match employee contributions or pay part of the profit sharing contribution to non-owners. Traditional group 401(k) plans are also subject to a government non-discrimination test to make sure that the plan benefits all participants and not just the owners. Whereas in the case of an Individual 401(k), the participants are all owners and their spouses so there is no conflict of interest.

There is a lot to learn about the Individual 401(k) plan to determine if it’s the best fit for your business. The type of plan you decide to get will depend greatly on the amount you intend to save, therefore it’s important to speak with your advisor about each plan and its details. Whatever you decide to do, remember that the deadline to establish this plan is approaching fast, so be sure not to procrastinate or you will lose out on your tax cut and retirement savings!


By Robert Castillo, ADPA®

Robert Castillo, ADPA® is a Financial Advisor at Santa Monica, CA based Gerber Kawasaki, an independent investment advisory and wealth management firm with approximately $502 million in assets under advisement. Robert is also an accredited domestic partnership advisor and has been specializing in financial planning for LGBT same-sex and unmarried couples since 2009. To contact Robert, please email him at Robert@GerberKawasaki.com Twitter: @RCastilloLA

Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Gerber Kawasaki Inc, a registered investment advisor and separate entity from LPL Financial. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which course of action may be appropriate for you, consult your financial advisor. No strategy assures success or protects against loss.
This information is not intended as authoritative guidance or tax or legal advice. You should consult with your attorney or tax advisor for guidance on your specific situation.
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