An Owner-Only 401K

An Owner-Only 401(k) Plan An owner-only 401(k) plan is a way to combine the tax advantages of an employer-sponsored retirement plan with pre-tax personal retirement savings.

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Table of Contents A Financially-Independent Retirement

Page

2

Sources of Retirement Income

2-3

What Is an Owner-Only 401(k) Plan?

3

Owner-Only 401(k) Plan Highlights

4

Contribution Comparison: Incorporated Business

5

Contribution Comparison: Unincorporated Business

6

Owner-Only 401(k) Plan Tax Summary

7

Owner-Only 401(k) Plan Advantages and Disadvantages

8

The Power of an Owner-Only 401(k) Plan

9

The Roth 401(k) Option

10

Important Information

11

Geoff Thompson

Synergistic Life and Estate 5512 W. L awrence Chicago, Il 60630 Office: (800) 320-4192 geob4u@gmail.com http://finsecurity.com/geob4u February 05, 2018

A Financially-Independent Retirement How Many People Are Financially Independent During Retirement?

Most people want to be financially independent during their retirement years. statistics, however, tell a different story.

Government

According to the Social Security Administration, of people age 65 and older:

34.0% have incomes under $20,000

Only 18.8% have incomes in excess of $75,000

26.5% have incomes from $20,000 to $40,000

20.7% have incomes from $40,000 to $75,000

Source: Social Security Administration, Office of Policy, Income of the Population 55 or older, 2014; released April 2016

Which group will you be in?

The secret to financial independence at retirement is to commit to a plan today, while you're working and earning an income, a portion of which can be saved for your future financial security!

Sources of Retirement Income If you are like many small business owners who are hard at work today growing their businesses, you are also concerned with how to most effectively secure a comfortable retirement for the future. When you retire, your retirement income will depend on three primary sources: Social Security

An Owner-Only 401(k) Plan for

According to the Social Security Administration, the average retired worker in 2018 receives an estimated $1,404 monthly benefit, about 40% of average pre-retirement income. As pre-retirement income increases, however, the percentage replaced by Social Security declines.

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Employer-Sponsored Plans and IRAs

Home Ownership and Personal Retirement Savings

You may be eligible to participate in a retirement plan established by your employer and receive pension income at your retirement.

You may also be able to contribute to an individual retirement account (IRA) to supplement Social Security and pension benefits.

For many people, there is a gap between the retirement income they can expect from Social Security and employer-sponsored plans/IRAs and their retirement income objectives. Home equity can be used to bolster retirement security. Personal retirement savings, including bank and brokerage accounts and insurance and annuity contracts, can be used to bridge a retirement income gap.

An owner-only 401(k) plan is a way to combine the tax advantages of an employersponsored retirement plan with pre-tax personal retirement savings.

What Is an Owner-Only 401(k) Plan?

The 401(k) plan has been available for over 20 years, enabling Americans to save billions of dollars for retirement on a tax-advantaged basis. It was only in 2002, however, that a 401(k) plan became an attractive option for an owner-onl ybusi ness‌a busi nesst hatempl oysonl yt heowner and his or her spouse.

A 401(k) plan is essentially a profit sharing plan that also allows pre-tax elective salary deferral contributions to be made by employees. This means that your business can, on a discretionary basis, make a tax-deductible profit sharing contribution to the 401(k) plan equal to a maximum of 25% of your compensation (20% of net earnings from self-employment if your business is unincorporated). In addition, as an employee, you can make a pre-tax elective salary deferral of $18,500 in 2018 (as adjusted for inflation), but not to exceed 100% of your compensation/income for the year. An additional "catch-up" contribution may be made if you are age 50 or older ($6,000 in 2018). The combined profit sharing and elective salary deferral cannot exceed $55,000 in 2018 (as adjusted for inflation).

It is the combination of profit sharing contributions and elective employee salary deferrals that make an owner-only 401(k) plan so attractive to successful small business owners, as compared to other popular retirement plans that have lower contribution limits.

IMPORTANT NOTE: An owner-only 401(k) plan can be adopted by any type of business – sole proprietorship, partnership, corporation –so long as the owner and his or her spouse are the only employees eligible to participate in the plan.

If you have, or expect to have in the near future, other full-time employees who are or will be eligible to participate in the plan, an owner-only 401(k) plan is not an alternative for your business.

An Owner-Only 401(k) Plan for

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Owner-Only 401(k) Plan Highlights Higher Contribution Limits

Pre-Tax Contributions

Tax-Deferred Growth

Flexibility

Easier Administration

Access to Funds

An Owner-Only 401(k) Plan for

An owner-only 401(k) plan provides the highest potential contribution limit, when compared to other types of qualified retirement plans, making it attractive to successful business owners who want to save substantial amounts for retirement.

Profit sharing contributions made by the business are tax deductible as a business expense, up to the stated maximum.

Elective employee salary deferrals of $18,500 or less to the plan in 2018 are not included in the employee's income, meaning that they are made with before-tax dollars.

An additional catch-up contribution of $6,000 can be made if you are age 50 or older in 2018.

Investment gains and earnings on 401(k) plan accounts are not taxed until actually distributed.

Contributions to a 401(k) plan are flexible. Both the profit sharing contribution and the elective employee salary deferral can be changed from year to year, or even skipped in a particular year.

This provides the flexibility to weather a tough business climate or some other unforeseen financial difficulty.

An owner-only 401(k) plan is exempt from discrimination testing, since only the owner (and his or her spouse if employed by the business) is covered by the plan.

There are no IRS filing requirements until plan assets exceed $250,000 and then the IRS provides a streamlined form (Form 5500-EZ), which is suited for small plans.

Certain plans that are attractive to small businesses, such as SEPs and SIMPLE retirement plans, allow for withdrawals from the plan, subject to income tax and a possible penalty tax, but not loans from the plan. An owner-only 401(k) plan can be set up to allow for both loans and withdrawals. While a loan is not subject to taxation when made, it must be repaid.

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Contribution Comparison: Incorporated Business The table that follows compares the maximum contributions that can be made to an owner-only 401(k) plan with those that can be made to other popular types of qualified retirement plans available to incorporated businesses.

Assumptions:  Tax Year: 2018  Owner's W-2 compensation: $100,000  Maximum employer contribution: 25% of compensation (3% in a SIMPLE IRA plan)  Maximum elective employee salary deferral: $18,500 ($12,500 in a SIMPLE IRA plan)  Maximum allowable contribution: $55,000 Maximum Annual Contributions (2018): Owner-Only 401(k) Plan

SEP IRA Plan

Money Purchase or Profit Sharing Plan

SIMPLE IRA Plan

Employer Contribution(1)

$25,000

$25,000

$25,000

$3,000

Elective Employee Salary Deferral

$18,500

Not Available

Not Available

$12,500

Total Initial Contribution(2)

$43,500

$25,000

$25,000

$15,500

Catch-Up Contribution(3)

$6,000

Not Available

Not Available

$3,000

$49,500

$25,000

$25,000

$18,500

Total Allowable Contribution(4) Notes: (1)

For an incorporated business, the employer's contribution is based on the employee's W-2 compensation.

(1)

The total initial contribution cannot exceed the lesser of 100% of the employee's compensation or the maximum allowable contribution ($55,000 in 2018).

(2)

In addition to the regular elective employee salary deferral, a catch-up contribution (up to $6,000 in 2018 in a 401(k) plan or up to $3,000 in a SIMPLE IRA plan) may be made by plan participants who are age 50 or older, if catch-up contributions are allowed by the plan.

(3)

The total allowable contribution cannot exceed the lesser of 100% of the employee's compensation or the maximum allowable contribution, plus any catch-up contribution.

An Owner-Only 401(k) Plan for

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Contribution Comparison: Unincorporated Business The table that follows compares the maximum contributions that can be made to an owner-only 401(k) plan with those that can be made to other popular types of qualified retirement plans available to unincorporated businesses (sole proprietorships and partnerships).

Assumptions:  Tax Year: 2018  Net earnings from self-employment: $100,000  Maximum business contribution for self-employed individuals: 20% of net earnings from self-employment (3% in a SIMPLE IRA plan)  Maximum elective employee salary deferral: $18,500 ($12,500 in a SIMPLE IRA plan)  Maximum allowable contribution: $55,000 Maximum Annual Contributions (2018): Money Purchase or Profit Sharing Plan

Owner-Only 401(k) Plan

SEP IRA Plan

$20,000

$20,000

$20,000

$3,000

$18,500

Not Available

Not Available

$12,500

Total Initial Contribution(2)

$38,500

$20,000

$20,000

$15,500

Catch-Up Contribution(3)

$6,000

Not Available

Not Available

$3,000

$44,500

$20,000

$20,000

$18,500

Business Contribution for Self-Employed(1) Elective Employee Salary Deferral

Total Allowable Contribution(4)

SIMPLE IRA Plan

Notes: (1)

For an unincorporated business, the contribution by the business on behalf of self-employed individuals is based on net earnings from self-employment. This figure takes into account one-half of the self-empl oyed’ s sel f -employment tax and the deduction for his or her contributions to the plan.

(2)

The total initial contribution cannot exceed the lesser of 100% of the employee's compensation or the maximum allowable contribution ($55,000 in 2018).

(3)

In addition to the regular elective employee salary deferral, a catch-up contribution (up to $6,000 in 2018 in a 401(k) plan or up to $3,000 in a SIMPLE IRA plan) may be made by plan participants who are age 50 or older, if catch-up contributions are allowed by the plan.

(4)

The total allowable contribution cannot exceed the lesser of 100% of the employee's compensation or the maximum allowable contribution, plus any catch-up contribution.

An Owner-Only 401(k) Plan for

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Owner-Only 401(k) Plan Tax Summary Contributions:

 Employer: Contributions by the business to the plan are tax deductible in the year made, up to specified maximum amounts. In addition, employer contributions are not currently taxable to the employee.  Employee: Elective employee salary deferrals are not included in the employee's taxable income, meaning that they are made with before-tax dollars.

Growth:

Employer and employee contributions are placed in the employee's account, where they are invested. Interest earnings and investment gains are not taxed until they are received as plan distributions. This means that all investment growth is available to accumulate, potentially resulting in a larger accumulation when compared to currently taxable retirement accumulation alternatives.

Distributions:

Since all contributions to an owner-only 401(k) plan are made with pre-tax dollars and since taxation on investment growth is deferred, distributions from an owner-only 401(k) plan are included in the owner's gross income as received.

An owner-only 401(k) plan must meet minimum distribution requirements, which generally require that distributions must begin no later than April 1 of the calendar year following the year in which the participant reaches age 70-1/2 or the year in which the participant actually retires if earlier.

Further, distributions can be received as:  Lump Sum Distribution: The entire balance is distributed in one tax year. Special tax treatment is available to participants born before 1936. For participants born in 1936 or later, the entire lump sum distribution is subject to income tax in the year received. The lump sum distribution, however, can be rolled over to an IRA or another qualified plan in order to defer taxation.  Periodic Payments: Annual or more frequent payments can be made over the life of the participant, over the lives of the participant and designated beneficiary or for a period certain number of years. Assuming all contributions to the plan were on a pre-tax basis, periodic payment distributions are subject to income tax in the year received.

An Owner-Only 401(k) Plan for

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Owner-Only 401(k) Plan Advantages and Disadvantages Owner-Only 401(k) Plan advantages include:

 Higher Contribution Limits: An owner-only 401(k) plan allows for higher contribution limits than other retirement plans widely used by small businesses.

If saving for retirement is a priority, this is an attractive feature of an owner-only 401(k) plan.  Pre-Tax Contributions: The business can deduct contributions it makes to the plan.

Any elective salary deferrals made by the owner are not currently included in income.  Tax-Deferred Growth: Investment gains and earnings on 401(k) plan accounts are not taxed until distributed.  Flexibility: Contributions to the plan can be increased, decreased or even skipped at the discretion of the business owner.  Access: An owner-only 401(k) plan can be designed to allow for both withdrawals and loans from the 401(k) account.  Rollover: It may be possible to rollover funds from other retirement plans to an owneronly 401(k) plan, resulting in all retirement funds being managed under the "umbrella" of the 401(k) plan.  Easier Administration: Nondiscrimination testing is not required and any IRS reporting is done on a streamlined form suited for small plans.

Owner-Only 401(k) Plan disadvantages include:

 Potential Business Growth: An owner-only 401(k) plan can cover only the business owner plus his or her spouse if employed by the business. Should the business grow enough to hire full-time employees, the owner-only 401(k) plan must become a regular 401(k) plan, subject to discrimination testing, more involved administration requirements and, possibly, limitations on the size of the contributions that can be made by higher-paid employees.  Administrative Requirements: An owner-only 401(k) plan does have administrative requirements, such as a plan trustee and record keeping, that are not present in other types of plans popular with small businesses, such as SEP and SIMPLE IRA plans.  Multiple Plans: If you participate in the retirement plan of another employer, you may not be eligible to contribute the maximum amounts to an owner-only 401(k) plan.

An Owner-Only 401(k) Plan for

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The Power of an Owner-Only 401(k) Plan The primary owner-only 401(k) plan tax advantages - pre-tax contributions and taxdeferred growth - provide the opportunity to accumulate substantially more money for retirement, when compared to saving with after-tax contributions, the earnings on which are taxed each year. The chart below illustrates hypothetical results over 20 years for each $1,000 contributed to an owner-only 401(k) plan, compared to investing the $750 remaining after taxes are paid in a plan whose earnings are taxed, assuming a 25% income tax bracket.

20 Year Results for Each $1,000 Contributed Qualified Retirement Plan

(1)

(2)

:

 $1,000 annual before-tax contribution  8% hypothetical before-tax annual rate of return After-Tax Plan (25% tax bracket):

 $750 annual after-tax contribution  6% hypothetical after-tax annual rate of return

$49,423

20 Years

$29,245

15 years

$18,504 $15,645 $10,479

10 Years 5 Years $0

$29,324

$6,336 $4,481 $10,000

$20,000

$30,000

$40,000

$50,000

$60,000

(1)

This is a hypothetical illustration only and is not indicative of any particular investment or performance. It does not reflect the fees and expenses associated with any particular investment, which would reduce the performance shown in this hypothetical illustration if they were included.

(1)

Qualified Retirement Plan: If the $49,423 value is taken as a lump sum at the end of the 20th year, the principal amount remaining after payment of income tax is $37,067 at a 25% rate (assumes no penalty tax is assessed), compared to $29, 245 available in the after-tax plan.

An Owner-Only 401(k) Plan for

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The Roth 401(k) Option Pay Now or Pay Later?

With the availability of a Roth 401(k) plan option, if the 401(k) plan permits, employees can now choose to contribute all or a portion of their 401(k) plan elective salary deferrals to a Roth 401(k) account.

The Roth 401(k) option is similar to a Roth IRA, in that contributions are made with after-tax dollars since Roth contributions are not excluded from current income. The Roth 401(k) account grows tax free, and here's the Roth t ax advant age…qual i f i ed di st r i but i ons f r om a Rot h 401( k) account are received completely free of federal income tax. A qualified distribution is one that is made more than five years after the Roth 401(k) account is established and the plan participant is at least age 59-1/2, or is deceased or disabled, or the funds are being used to purchase a first home ($10,000 lifetime limit).

In addition, if the plan permits, plan participants may roll over all or part of the eligible portion of their regular 401(k) account to a Roth 401(k) account inside of the plan. While qualified distributions from a Roth 401(k) account will be received free of income tax in the future, federal income tax must be paid on the amount that is rolled over to the Roth 401(k) account in the year the rollover takes place. In order to avoid unforeseen and/or negative tax consequences, a professional tax adviser should be consulted before transferring funds from a regular 401(k) account to a Roth 401(k) account.

If the 401(k) plan offers a Roth option, you have the choice of:  Paying taxes later by contributing pre-tax dollars to a regular 401(k) account, where the money will grow on a tax-deferred basis until distributed, at which time the contributions and earnings will be taxed in your then-current income tax bracket in the year they are distributed; or  Paying taxes now by contributing money that has already been taxed to a Roth 401(k) account, or converting all or part of the eligible portion of a regular 401(k) account to a Roth 401(k) account, where the funds grow tax free and are distributed free of income tax so long as the qualified distribution requirements are met; or  Splitting your elective salary deferrals between a regular 401(k) account and a Roth 401(k) account, getting tax benefits today in the form of pre-tax contributions to the regular 401(k) account and in the future in the form of tax-free distributions from the Roth 401(k) account.

An Owner-Only 401(k) Plan for

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Important Information The information, general principles and conclusions presented in this report are subject to local, state and federal laws and regulations, court cases and any revisions of same. While every care has been taken in the preparation of this report, VSA, L.P. is not engaged in providing legal, accounting, financial or other professional services. This report should not be used as a substitute for the professional advice of an attorney, accountant, or other qualified professional.

U.S. Treasury Circular 230 may require us to advise you that "any tax information provided in this document is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer. The tax information was written to support the promotion or marketing of the transaction(s) or matter(s) addressed and you should seek advice based on your particular circumstances from an independent tax advisor." Š VSA, LP

All rights reserved (VSA 1d1-04 ed. 01-18)

An Owner-Only 401(k) Plan for

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