There Are, Other Contribution Limits, Naturally Involved

Category: Finance.

With all the procedures involved in just keeping a small business operating, retirement planning often gets ignored. Some believe that the 401k plans only allow fairly low contributions and are also too complicated and expensive for the entrepreneur.

Even when the need for a retirement plan does end up front and center, it appears that the 401K is not often thought of even though specialized Solo 401K and IndividualK plans are available. Solo 401K and IndividualK plans were made much more attractive when EGTRRA( Economic Growth and Tax Relief Reconciliation Act of 2001) modified the legislation. Unless you are careful with your fact checking you may find yourself thinking that the 401K contribution limit for 2007 is$ 15, 500( ignoring the catch up contribution of$ 5000 for those over 50) . So if you are self- employed these plans can now constitute a great addition to your retirement choices as well as helping reduce your taxes. This, is only part, however of the story. How this can affect your retirement funding as a self- employed person may be a touch unclear.

An employee can also receive a 401K contribution made by the company. As an employee, you are entitled to make this$ 15, 500" elective salary deferral. " Next, with an incorporated business, as employer, you can, give yourself as an employee a" profit- sharing" contribution which can be as much as 25% of eligible pay and there is no deduction for your salary deferral. 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. The profit- sharing contribution for an unincorporated business follows a somewhat more unfavorable rule since the 25% is based on net self- employment income. Whichever case applies to your business, a Solo 401K can help you put away a significant part of your earnings. There are, other contribution limits, naturally involved. Since these contributions are pre- tax and any earnings and interest as well as the principle from the 401K will not be subject to taxes until withdrawn, your tax liability can also be reduced.

The 2007/ 2008 limit of$ 15, 500 for the elective salary deferral is called the 402g limit. The same holds true for the catch up limit which is currently set at$ 500The section 415 limit sets the total amount that can be contributed adding together the employee, or elective salary deferral, or profit, and the employer- sharing, contributions. The limit is indexed to inflation and is adjusted in$ 500 increments. For 2007 that limit is set as the lesser of 100 per cent of the employee salary or$ 45, 000( plus, the, if it applies$ 5000 catch- up) . Since you would have the ability to make fairly large pre- tax contributions as well as enjoy considerable freedom in making your investments, checking into a Solo 401K or an IndividualK plan to see if it fits into your retirement funding program is a good idea for any self- employed person. In 2008, the section 415 limit increases to$ 46, 00 Being able to establish a Solo 401K as a self- directed 401K allows a wide range of investment options giving you a great deal of control and flexibility in how you apply your funds.

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