There are a lot of companies selling 401(k) plans for owner only companies. There are a number of additional benefits to a 401(k) over an IRA, but are these benefits worth the additional cost and responsibility of a qualified retirement plan? The definitive answer is maybe. I know this doesn’t sound very definitive, but the answer does truly vary based upon your goals, and the nature of your business.
First we should look at the Individual 401(k) plan and what IS required. I’ve seen some plans out there that set up the plan and let you contribute what you want within the limits each year and that is it. These plans do require administration. They must be monitored to ensure they are run within the confines of the law and the plan document. As well as file the required forms once they become necessary. Contrary to some marketing these plans are not the same as an IRA, even though they do require less than a 401(k) plan that also covers non-owner employees.
Next you need to look at your goals. I’ve seen many Individual 401(k) plans in which the owner of the company is not contributing more than the IRA limits. You should make sure the additional requirements are worth the additional benefit.
Finally, you should look at the nature of your business. Are you going to hire employees anytime soon? If you are going to hire employees will they become eligible? Are you prepared for the additional cost if they do become eligible?
Simply put, if an Individual 401(k) Plan is well thought out, appropriate for the company, and correctly designed it can be well worth the trouble, but if it doesn’t fit or is poorly designed and administered it can be more of a burden then a benefit. If you are unsure, save yourself the hassle and potential for trouble and contact a consultant that can review your goals, needs, and business in order to objectively tell you if it is a good fit for you. Keep in mind you’ll want someone that is not in the process of selling you a plan to perform this review.
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