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Financial matters are always on the focus of business owners. For self employed individuals, tax-planning is an important process that can enhance earnings and help business owners accelerate wealth building. At the same time, business owners also need to think of retirement planning and saving for their future. Fortunately, you can achieve both of these goals by setting up a Solo 401(k) retirement plan.
Solo 401(k)s are self-directed retirement plans that offer flexible investment choices and one of the highest contribution limits among qualified retirement plans - $53,000 for 2016, or $59,000 if you're 50 or older. This lets participants lower their taxable income by thousands of dollars each year.
There are a number of 401k retirement plan options available to small business owners. In short, there are a variety of ways for you to customize this plan to have more options. Consider the following options you have.
- The employer can elect the types of contributions they wish to make. You decide if you want to contribute to the employee's plan or not.
-If you do decide to contribute, under the traditional 401k plan, you determine what percentage of the employee's compensation you wish to contribute.
- Consider the safe harbor 401k plan where you can match the employee's contributions dollar for dollar up to three percent of their compensation.
-When you do contribute, your contributions are tax deductible.
- Consider vesting. If you want to put your money into an employee but you want to safeguard those funds to keep the employee working for you, consider vesting the money. Over time, the amount of vesting increases until the employee reaches 100 percent at which time all employer contributions are available to the employee.
The rules for establishing a 401k are not as difficult as you may think and the costs overall are minimal for doing so. As mentioned, there are tax benefits to the employer and employees may be encouraged to stay with your company if you offer them a retirement plan. Best of all, you can shop around for the right investment firm to obtain the 401k plan from, which means you have plenty of options to select from and lower costs due to the competition.
As a small business owner, you may have thought that you simply could not offer your employees any type of retirement plan. That is not the case. In fact, you are likely to find yourself with opportunities to tailor a plan that works for your small business 401k needs.
Here are the deadlines:
Many people mistakenly assume that the Solo 401(k) account need to be set up and receive contributions before the end of each year. Because of this, eligible entrepreneurs tend to delay setting up a retirement plan and can miss out on tax benefits and retirement savings. There are different deadlines for setting up a Solo 401(k) and for making contributions - and self-employed professionals need to know these deadlines to plan ahead
You must set up your Solo 401(k) by the end of each year. Small-business owners have until the last day of the year to set up a Solo 401(k) plan that qualifies for that year's contributions. To be eligible for a Solo 401(k) plan, you must engage in a self-employed business activity with the intention of generating profit. That business can't have any employees aside from yourself and your spouse. But you can make contributions into the next year
Fortunately, Solo 401k contributions do not need to be made by Dec. 31 to be counted for the tax year.
According to the tax code, Solo 401(k) plans can receive contributions up to your business' tax-filing deadline. For sole proprietorships, partnerships or LLCs, the contribution deadline is April 15 of the following tax year. For corporations, it's March 15. You can even apply for an extension if needed.
What do you stand to gain?
By contributing to a Solo 401(k) plan, you can lower your taxable income by a substantial amount. The funds can grow on a tax-deferred basis, meaning you won't pay taxes on the wealth you accumulate until you make withdrawals during retirement.For business owners with very high incomes, the maximum contributions probably will not be enough for you to meet your retirement goal. [You can contribute $17,000 annually, plus a $5,500 catch-up contribution if you are over age 50, as well as a profit-sharing contribution from your company of up to $33,000. So in 2012, you could contribute up to $55,500 per year into a 401(k) plan]. For entrepreneurs who want to save more, and do so with an above-the-line deduction, a defined benefit plan could be the answer.
What Is a Defined Benefit Plan?
A defined benefit plan is just that, defined. In other words, a business owner decides how much he or she wants to be paid from the plan annually during retirement, taking into account age, income and years until retirement. Owners of smaller companies who are over age 50 but who have primarily younger employees tend to be good candidates for this strategy. The older the business owner is, the more money they will be able to put in for themselves, because at retirement age, a defined amount has to be there.
-Pros. Since the end benefit is defined, the amount you put in now is also defined. And that amount is often much higher than the 401(k) limit of $55,500. The actuarial calculations are complicated, but they must assume a rate of return on the money in the plan. In a low-interest-rate environment like we are in now, this dictates a higher contribution to the plan. Some people might be able to put more than $100,000 per year into a defined benefit plan if they have the income to qualify. Paired with a 401(k) plan, this could be an opportunity for future retirement savings with tax savings today.
-Cons. The biggest issue most entrepreneurs point to is that a defined benefit plan is fixed. You must make annual contributions whether or not the business has had a good or bad year. You must also commit to the plan for an extended period; you can't just do it for a year and then shut it down. Committing to five or more years of contributions might be too burdensome for some business owners.
The key to understanding defined benefit plans is that high-income business owners might have an opportunity to put away more funds for retirement in a tax-advantaged way. In the future, when we likely will see higher taxes, this will be very beneficial. Large corporations have continued to underfund pension plans because of the current low-interest-rate environment (depressed returns call for larger contributions, something large companies would prefer to avoid). But for successful small business owners, this could be a perfect opportunity to speed up the diversification of business wealth. Click Here to visit our main website.
Financial matters are always on the focus of business owners. For self employed individuals, tax-planning is an important process that can enhance earnings and help business owners accelerate wealth building. At the same time, business owners also need to think of retirement planning and saving for their future. Fortunately, you can achieve both of these goals by setting up a Solo 401(k) retirement plan.
Solo 401(k)s are self-directed retirement plans that offer flexible investment choices and one of the highest contribution limits among qualified retirement plans - $53,000 for 2016, or $59,000 if you're 50 or older. This lets participants lower their taxable income by thousands of dollars each year.
There are a number of 401k retirement plan options available to small business owners. In short, there are a variety of ways for you to customize this plan to have more options. Consider the following options you have.
- The employer can elect the types of contributions they wish to make. You decide if you want to contribute to the employee's plan or not.
-If you do decide to contribute, under the traditional 401k plan, you determine what percentage of the employee's compensation you wish to contribute.
- Consider the safe harbor 401k plan where you can match the employee's contributions dollar for dollar up to three percent of their compensation.
-When you do contribute, your contributions are tax deductible.
- Consider vesting. If you want to put your money into an employee but you want to safeguard those funds to keep the employee working for you, consider vesting the money. Over time, the amount of vesting increases until the employee reaches 100 percent at which time all employer contributions are available to the employee.
The rules for establishing a 401k are not as difficult as you may think and the costs overall are minimal for doing so. As mentioned, there are tax benefits to the employer and employees may be encouraged to stay with your company if you offer them a retirement plan. Best of all, you can shop around for the right investment firm to obtain the 401k plan from, which means you have plenty of options to select from and lower costs due to the competition.
As a small business owner, you may have thought that you simply could not offer your employees any type of retirement plan. That is not the case. In fact, you are likely to find yourself with opportunities to tailor a plan that works for your small business 401k needs.
Here are the deadlines:
Many people mistakenly assume that the Solo 401(k) account need to be set up and receive contributions before the end of each year. Because of this, eligible entrepreneurs tend to delay setting up a retirement plan and can miss out on tax benefits and retirement savings. There are different deadlines for setting up a Solo 401(k) and for making contributions - and self-employed professionals need to know these deadlines to plan ahead
You must set up your Solo 401(k) by the end of each year. Small-business owners have until the last day of the year to set up a Solo 401(k) plan that qualifies for that year's contributions. To be eligible for a Solo 401(k) plan, you must engage in a self-employed business activity with the intention of generating profit. That business can't have any employees aside from yourself and your spouse. But you can make contributions into the next year
Fortunately, Solo 401k contributions do not need to be made by Dec. 31 to be counted for the tax year.
According to the tax code, Solo 401(k) plans can receive contributions up to your business' tax-filing deadline. For sole proprietorships, partnerships or LLCs, the contribution deadline is April 15 of the following tax year. For corporations, it's March 15. You can even apply for an extension if needed.
What do you stand to gain?
By contributing to a Solo 401(k) plan, you can lower your taxable income by a substantial amount. The funds can grow on a tax-deferred basis, meaning you won't pay taxes on the wealth you accumulate until you make withdrawals during retirement.For business owners with very high incomes, the maximum contributions probably will not be enough for you to meet your retirement goal. [You can contribute $17,000 annually, plus a $5,500 catch-up contribution if you are over age 50, as well as a profit-sharing contribution from your company of up to $33,000. So in 2012, you could contribute up to $55,500 per year into a 401(k) plan]. For entrepreneurs who want to save more, and do so with an above-the-line deduction, a defined benefit plan could be the answer.
What Is a Defined Benefit Plan?
A defined benefit plan is just that, defined. In other words, a business owner decides how much he or she wants to be paid from the plan annually during retirement, taking into account age, income and years until retirement. Owners of smaller companies who are over age 50 but who have primarily younger employees tend to be good candidates for this strategy. The older the business owner is, the more money they will be able to put in for themselves, because at retirement age, a defined amount has to be there.
-Pros. Since the end benefit is defined, the amount you put in now is also defined. And that amount is often much higher than the 401(k) limit of $55,500. The actuarial calculations are complicated, but they must assume a rate of return on the money in the plan. In a low-interest-rate environment like we are in now, this dictates a higher contribution to the plan. Some people might be able to put more than $100,000 per year into a defined benefit plan if they have the income to qualify. Paired with a 401(k) plan, this could be an opportunity for future retirement savings with tax savings today.
-Cons. The biggest issue most entrepreneurs point to is that a defined benefit plan is fixed. You must make annual contributions whether or not the business has had a good or bad year. You must also commit to the plan for an extended period; you can't just do it for a year and then shut it down. Committing to five or more years of contributions might be too burdensome for some business owners.
The key to understanding defined benefit plans is that high-income business owners might have an opportunity to put away more funds for retirement in a tax-advantaged way. In the future, when we likely will see higher taxes, this will be very beneficial. Large corporations have continued to underfund pension plans because of the current low-interest-rate environment (depressed returns call for larger contributions, something large companies would prefer to avoid). But for successful small business owners, this could be a perfect opportunity to speed up the diversification of business wealth. Click Here to visit our main website.