Individual 401(k) Plan: Traditional and Roth

When you establish an Individual 401(k) plan, the IRS sees you as both the employer (because you own the business) and as an employee of the business. Designating contributions accurately as either Traditional or Roth and as either employer or elective salary deferral is critically important.

Contributions and designations should be submitted using the contribution transmittal form.

Enhanced Funding Feature: Direct Deposit
Salary deferral contributions can be made via direct deposit. Log in to your account at schwab.com and navigate to Move Money > Routing Numbers & Direct Deposit for instructions on setting up online transfers from your external bank account into your Schwab Individual 401(k) account.

Note: Direct Deposit is only available for salary deferral contributions. All employer contributions to an Individual 401(k) must be made by check, wire, or journal (if applicable).

Individual 401(k) plans are funded by a combination of traditional elective salary deferrals, designated Roth elective salary deferrals, and employer profit-sharing contributions. New for 2025, employer profit-sharing contributions can also be designated as Roth contributions. Individual 401(k) plans are not required to be funded annually.

When you establish an Individual 401(k) plan, the IRS sees you as both the employer (because you own the business) and as an employee of the business. Designating contributions accurately as either Traditional or Roth and as either employer or elective salary deferral is critically important.

Contributions and designations should be submitted using the contribution transmittal form.

Traditional Individual 401(k) Employer Profit-Sharing Contributions

- When the EMPLOYER contributes to a Traditional Individual 401(k), it is generally classified as a business expense and taken as a tax deduction on the business' tax return for the year allocated. 
- When the EMPLOYEE receives that contribution, it would not be taxable income because the contribution went into a tax-deferred account. Tax liabilities would be incurred as distributions are withdrawn from the plan upon retirement.

For example, on 1/21/2026 you make an EMPLOYER tax-deferred Individual 401(k) contribution for $15,000 to the plan and can choose to designate it for tax year 2025 or 2026.

• Tax implications for you as EMPLOYER: You include the $15,000 expense as a deduction for the tax year allocated on your business' tax return.
• Tax implications for you as EMPLOYEE: Deferred until distributions are taken from the plan upon retirement.

Roth Individual 401(k) Employer Profit Sharing Contributions 

- When the EMPLOYER contributes to a Roth Individual 401(k), it is generally classified as a business expense and taken as a tax deduction on the business' tax return for the year allocated. 
- The tax implications for EMPLOYEES are very different. In the year an employee receives a Roth contribution, that amount must be included in their taxable income and reported on their individual tax return.
- As the EMPLOYEE, you will receive Form 1099R from Schwab in January of the year following the year you (as the employer) made the Roth contribution. Schwab is required to provide Form 1099R information to the IRS.

For example, on 1/21/2026 you make an EMPLOYER ROTH Individual 401(k) contribution for $15,000 to the plan and can choose to designate it for tax year 2025 or 2026.

• Tax implications for you as EMPLOYER: You include the $15,000 expense as a deduction for the tax year allocated on your business' tax return.
• NEW: Tax implications for you as EMPLOYEE: You will receive a 1099R from Schwab in January 2027, reporting $15,000 taxable income for 2026.

Important: 
- Contributions cannot be recharacterized once designated as Roth or Traditional. The designation is irrevocable. The IRS does not allow you to reclassify contributions. 
- Income taxes cannot be withheld from Roth EMPLOYER contributions.

Note: Check your Roth Individual 401(k) statements regularly to ensure your contributions are coded correctly as EMPLOYEE/salary elective deferral vs. EMPLOYER.

SECURE 2.0 Act allows certain business owners to both establish an Individual 401(k) and make retroactive employer contributions until the tax filing deadline plus extensions.

Situations vary, but generally: 
- Unincorporated business owners have until the tax filing deadline, excluding extensions, to make retroactive elective deferrals. 
- Incorporated business owners must make deferral contributions in the same tax year.

Yes, once your Individual 401(k) and/or Roth Individual 401(k) is established at Schwab, you can transfer an existing Individual 401(k) to Schwab from another firm.

- For a like-titled transfer, complete the TOA form Transfer Your Account to Schwab | Charles Schwab.

Note: If you have both an Individual 401(k) and a Roth Individual 401(k), you will need to submit one form for each account.

- If considering a rollover from a retirement plan currently held with a prior employer, you should contact your prior plan administrator.

- You can roll over a Traditional IRA into your Individual 401(k), but you cannot roll over your Roth IRA into your Roth Individual 401(k).

You'll need to file IRS Form 5500 annually when your plan assets reach or exceed $250,000 or when you terminate your plan.

You must have a triggering event—generally either termination of employment or retirement—to take a distribution.

Traditional Individual 401(k)

• Generally, all withdrawals are subject to taxes.
• Withdrawals before age 59½ may be subject to a 10% penalty.
• Distributions are subject to a mandatory 20% federal tax withholding, except for Required Minimum Distributions (RMDs), hardship withdrawals, certain qualified exceptions, and direct rollovers.
• If you own 5% or more of the business, you must begin taking RMDs annually, starting with the year you reach age 73. If you don't make withdrawals, you may be subject to a penalty.

Under SECURE 2.0, if you don't take your RMD by the IRS deadline, a 25% excise tax on insufficient or late RMD withdrawals applies. If the RMD is corrected timely, the penalty can be reduced to 10%. Follow the IRS guidelines and consult your tax advisor.

Roth Individual 401(k)

Qualified Distributions: Always tax-free.

• You can start making qualified distributions from a Roth 401(k) once you have satisfied two conditions: You are age 59½ or older, and you have met the five-year rule.

Non-Qualified Distributions: Earnings are generally subject to taxes.

• If you are under 59½ and/or have not met the 5-year rule, you may have to pay income tax, and if you are under 59½, you may incur a 10% penalty.
• Early withdrawals must include both contributions and earnings prorated based on the ratio of contributions to earnings in the account.
• Earnings are subject to a mandatory 20% federal tax withholding, except for hardship withdrawals, certain qualified exceptions, and direct rollovers.

SECURE 2.0 has eliminated RMDs for Roth 401(k) plans starting in 2024.

- In-plan Roth rollover conversions 
- Participant loans
- Nondeductible employee salary deferrals