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One item that way too many small business owners ignore until it is too late 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 larger 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 options as well as helping reduce your taxes. When you read the contribution limits for 401Ks, the information may be less than explicit and sometimes is not all in the same place. This leads many people to believe that the maximum contribution (for 2007) is $15,500, plus, if you are over 50 a possible add on $5000 catch up contribution. There is actually a bit more to it than that. A company contribution for an employee can also be made to a 401K. How this can affect your retirement funding as a self-employed person may be a touch unclear. The $15,500 is referred to as an "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. In either case, you will find that a Solo 401K will allow you to save a substantial amount toward your retirement. 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are pre-tax and any earnings and interest as well as the principle from the 401K will not be subject to taxes until withdrawn, your tax liability can also be reduced. 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.
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Focused on retirement planning and options, 401K-and-IRA.com provides additonal information on the Solo401k and individual 401K plan advantages.
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