Solo 401k Plans And Individualk For The Sole ProprietorOne matter that way too many small business owners fail to handle well is planning for their own retirement. Even when the thought does make it to the surface, the business person rarely considers the possibilities of a 401K despite the availability of what are known as Solo 401K or IndividualK plans. It is often believed that 401Ks have relatively low limits on contributions and are, in any case, really only suitable for bigger businesses. Solo 401K and IndividualK plans were made much more attractive when EGTRRA (Economic Growth and Tax Relief Reconciliation Act of 2001) modified the legislation. So if you are self-employed these plans can now constitute a useful addition to your retirement choices as well as helping decrease your taxes. Reading about 401K plans can lead you to believe that the current contribution limit for 2007 is $15,500 (plus an added $5000 if you are over 50 and therefore qualify for a catch up contribution). This is not the full story. As you may realize, a company can fund a 401K contribution on behalf of an employee. How this can affect your retirement funding as a self-employed person may be a touch unclear. As an employee, you are entitled to make this $15,500 "elective salary deferral." If your business is incorporated, you can also make a "profit-sharing" contribution of up to 25% of your eligible pay without any deduction for the salary deferral. The profit-sharing contribution for an unincorporated business follows a somewhat more unfavorable rule since the 25% is based on net self-employment income. Essentially this means that you would need to deduct any elective salary deferral and any catchup contribution which would reduce the maximum profit-sharing amount. However your business is set up, you can use a Solo 401K as a valuable addition to your retirement planning. Since the contributions and the interest or other earnings from the 401K are not taxed until withdrawn, you also can substantially reduce your tax liability. For a little further clarification on the limits related to 401K, we have some more number soup. The $15,500 2007 and 2008 limit on the elective salary deferral is known as the 402g limit. Unsurprisingly, that is the section that specifies that limit. Since this limit is indexed to inflation, it may increase as may the catchup contribution. Both increase in $500 steps. Now, the actual, total possible contribution adding in both the employee and employer contributions is set by section 415. Section specifies the 2007 limit to be the lesser of $45,000 (plus the catchup contribution) or 100% of the employee salary. This will increase for 2008 to a maximum of $46,000 plus the catchup if it applies. A nice feature of the Solo 401K is that they can be set up as self-directed 401Ks. This would allow you basically total control over your contributed funds in terms of how they are invested. Essentially, with this sort of setup you can invest in nearly anything. With the investment options available and the capability of making substantial pre-tax contributions, investigating how a Solo 401K or IndividualK could be integrated into your planning for retirement makes a great deal of sense for an entrepreneur. Article Directory: http://www.articledashboard.com
Focused on retirement planning and options, 401K-and-IRA.com provides additonal information on 401K rules for retirement plans and the 401K limits on tax deferred contributions. |