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401k Solo Plan, Individual Retirement, Self Employed 401k Plans
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Published: November 1, 2006
Solo 401k plans are a new way for the self employed to put away more savings for retirement. Under new taxing laws implemented by the government, it is much easier for business owners and the self employed to put tax deductible income away in a solo retirement plan. Since all of the money is tax-deductible, it allows more money saving while not spending as much money on taxes per annum.
Under the old tax legislation, a self employed business owner could only put away up to 25 percent of your compensation (if your business is incorporated) or 20 percent of your self-employment income (as long as you are the sole proprietor).
Let's say you make $80,000 a year. If you are a self employed business owner you could put away $20,000 (25 percent of $80,000) and if you are the sole proprietor you could put away $16,000 (20 percent of $80,000). This is not bad, but you may want to put away a larger proportion of your yearly income, especially since you will be saving doubly. Primarily you will be lowering your tax bills and second you will be generating a larger stash of tax-deferred earnings for your solo retirement plan.
Under new tax laws, those who want to save more get a better alternative to the legislation of old. The reason for this is the two part nature of solo 401k plans. The first part is that you can contribute 100 percent of your first $15,000 ($20,000 if you will be 50 by year's end) into your solo 401k. The second part of this plan is that you can still opt to contribute and deduct the same numbers as were previously mentioned (25 percent of compensation or 20 percent of self employed income). The solo 401k almost doubles your available yearly contribution to a tax deductible retirement plan package. The maximum contribution to your solo 401k account would be either $35,000 or $31,000 depending on whether you are self employed or a business owner (more for those over 50: $40,000 and $36,000 respectively).
If you make more than the $80,000 used in the example, you will have the option to put away even more money in a solo retirement plan. There will be some form of dollar cap on solo 401k plans that should be taken into account. If you make more than $220,000 dollars annually, the solo 401k plan might not be for you due to the dollar caps. If you have employees, the tax law of the solo 401k plan might make it so you have to contribute to their accounts as well as your own. This is a standard practice in all 401k plans and you should get the advice of a competent retirement-plan assistant or financial planner before making any decisions on coverage.
The solo 401k plan is a great option for the self employed because of its versatility. On good years, you can contribute up to your maximum amount (which in this plan is higher than others) and maximize savings on taxes and for the future. On off years, there is no minimum that you have to put away. As a matter of fact, you can put away nothing if money is tight on a certain year. Its flexibility and money-saving prowess make the solo 401k plan a great option for the self employed looking to save more money for a solo retirement plan in the future.
401khelpcenter.com - Small business, Solo 401k, Individual k. 30 Oct. 2006. 401khelpcenter.com, LLC. 30 Oct. 2006 http://www.401khelpcenter.com/small_business_index .html.
Business - The Solo 401k. 1 August 2005. Smartmoney.com. 30 Oct. 2006 http://www.entrepreneur.com/worklife/personalfinan ce/retirementplanning/article79286.html.
Woodward, Dustin. "Individual(k) or Solo(k) 401k-like Plans." About.com. 30 Oct. 2006 http://mutualfunds.about.com/cs/retirement/a/indiv idual401k.htm.
Under the old tax legislation, a self employed business owner could only put away up to 25 percent of your compensation (if your business is incorporated) or 20 percent of your self-employment income (as long as you are the sole proprietor).
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Under new tax laws, those who want to save more get a better alternative to the legislation of old. The reason for this is the two part nature of solo 401k plans. The first part is that you can contribute 100 percent of your first $15,000 ($20,000 if you will be 50 by year's end) into your solo 401k. The second part of this plan is that you can still opt to contribute and deduct the same numbers as were previously mentioned (25 percent of compensation or 20 percent of self employed income). The solo 401k almost doubles your available yearly contribution to a tax deductible retirement plan package. The maximum contribution to your solo 401k account would be either $35,000 or $31,000 depending on whether you are self employed or a business owner (more for those over 50: $40,000 and $36,000 respectively).
If you make more than the $80,000 used in the example, you will have the option to put away even more money in a solo retirement plan. There will be some form of dollar cap on solo 401k plans that should be taken into account. If you make more than $220,000 dollars annually, the solo 401k plan might not be for you due to the dollar caps. If you have employees, the tax law of the solo 401k plan might make it so you have to contribute to their accounts as well as your own. This is a standard practice in all 401k plans and you should get the advice of a competent retirement-plan assistant or financial planner before making any decisions on coverage.
The solo 401k plan is a great option for the self employed because of its versatility. On good years, you can contribute up to your maximum amount (which in this plan is higher than others) and maximize savings on taxes and for the future. On off years, there is no minimum that you have to put away. As a matter of fact, you can put away nothing if money is tight on a certain year. Its flexibility and money-saving prowess make the solo 401k plan a great option for the self employed looking to save more money for a solo retirement plan in the future.
401khelpcenter.com - Small business, Solo 401k, Individual k. 30 Oct. 2006. 401khelpcenter.com, LLC. 30 Oct. 2006 http://www.401khelpcenter.com/small_business_index .html.
Business - The Solo 401k. 1 August 2005. Smartmoney.com. 30 Oct. 2006 http://www.entrepreneur.com/worklife/personalfinan ce/retirementplanning/article79286.html.
Woodward, Dustin. "Individual(k) or Solo(k) 401k-like Plans." About.com. 30 Oct. 2006 http://mutualfunds.about.com/cs/retirement/a/indiv idual401k.htm.
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