For many entrepreneurs, a sole proprietorship, retirement planning tends to be lost the day details involved in running the business today. Even if the thought of the surface makes the business person considers the possibility of a rarely 401K despite the availability of so-called Solo 401K or IndividualK plans. Many of them mistakenly assume that 401Ks is suitable only for larger companies and have relatively low contribution limits.However, changes to the original scheme by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) made the adoption of a solo 401K plan or IndividualK made a potentially valuable addition to your retirement package to bite and as a means to substantially reduce your tax return, as a self-employed.
Reading most information on 401Ks leads you to believe that the contribution limit for 2007 to $ 15,500 (plus an additional $ 5000 if you are older50 and therefore qualify for a "catch up" contribution). However, this is only a part of history. As you may know, a business can also contribute to a 401K, on behalf of an employee. What you might not be aware how this plays for you if you are self-employed.
The $ 15,500 is designated as an "elective salary deferral". If your business is integrated, you can also make a "profit-sharing contribution of up to 25% of eligible pay without any deduction forSalary deferral. If you are unincorporated, which is usually somewhat less favorable and limitations, which are at a 25% profit participation interest in net income from self-employment, which means $ 15,500 (plus any additional would be $ 5000) shift your weight to reduce net income.
In both cases, you will find that a Solo 401K allows you to save a substantial part of your retirement. Since the contributions and interest or other income from the 401K are not taxeduntil further notice, you can also significantly reduce your tax liability.
There are of course other contribution limits involved. The 2007/2008 limit of $ 15,500 for the salary deferral election will be limited as to 402g. The limit is linked to inflation and will be adjusted in $ 500 increments. The same goes for the catch limit, which is currently set at $ 5000. The Section 415 limit sets the total amount that can be contributed to the addition of workers, election or salaryDeferral and the employer or profit-sharing contributions. For 2007 that limit as the lesser of 100 percent of the employee's salary or $ 45,000-plus set is (if it applies, the $ 5,000 catch-up). In 2008, Section 415 limit to be increased to U.S. $ 46,000.
As a solo 401K or IndividualK structured plans as themselves are targeted 401Ks, they allow investment in almost everything from tax liens, real estate and mortgages, stocks, bonds and CDs. With the potential for fairsignificant contributions, tax and investment width allows all self-employed would do well to consider how a Solo 401K plan or an IndividualK would fit into their plan for it.
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