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Retirement Plans For The Self-Employed
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Article 3: Solo 401(k)
The individual or solo 401(k) has given owners of very small businesses the kind of benefit once available only for corporate employees. Now you can shelter thousands more dollars than in other types of self-employment retirement accounts.
These plans are available to businesses with no employees other than an owner and spouse, and to some partnerships. And even if you work for someone else but have a side business, you can open a solo 401(k) through most major mutual fund and investment companies.
The major advantage of a solo 401(k) is the opportunity for you to set aside more tax-sheltered money than previously allowed with other retirement options. You also have greater flexibility, including new investment options and expanded loan opportunities. The self-employed also can reduce current income taxes by deducting the entire amount of contributions from taxable income each year, either from personal income if your business is unincorporated or as an expense if your business is incorporated.
The solo 401(k) is a defined contribution plan with a maximum salary deferral of $18,000 and a total contribution limit of $46,000, including catch-up contributions for those over age 50.
The solo 401(k) option permits a self-employed person to contribute as an employee and as an employer. As an employee, you can put in up to 100 percent of the first $14,000 of your net self-employment income as a deferred-salary contribution. That means the Internal Revenue Service doesn’t tax the money until it’s withdrawn. In 2006, the limit increases to $15,000.
You also can contribute an additional 25 percent of your income if your business is incorporated, up to a maximum of $42,000 as deferred salary, and 20 percent if you are a sole proprietor. Spouses who are part of your incorporated business or provide your sole proprietorship services for a fee, can open a solo 401(k) as well.
People with full-time jobs, but who also run a business on the side, can shelter an additional portion of income from the side business by setting up a solo 401(k), even after deferring the maximum allowable in salary to their employer’s retirement plan.
The flexibility of solo 401(k) plans permit you to decide every year how much and even whether you want to contribute. If business is slow, you are not committed to a minimal contribution.
The plans are easy to set up and cheap to operate, unlike regular 401(k) plans with their complicated administrative requirements. You also can consolidate assets from your traditional IRA or other retirement plans into the 401(k) fund.
If you need cash, the law even permits you to borrow up to $50,000 or one-half of your solo 401(k) account balance, whichever is less. The money is tax free and penalty free, as long as you pay it back on time. If you don’t repay the loan, the money is considered a distribution, subject to taxes and penalties.
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Retirement Plans For The Self-Employed
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