Single 401(k)s Offer Attractive Features for Self-Employed Business Owners

If you own your own business and have no full-time employees other than immediate family members, you may be eligible to set up your own 401(k) plan.  But why would you want to?  Well, for starters, 401(k)s offer higher contribution limits than other retirement plans available for small businesses.  Also, you may be able to take loans from your 401(k), which provides more flexibility than IRAs and most other retirement savings vehicles.  Single 401(k) plans are advantageous for many small businesses, including sole-practitioner professionals, freelance writers or artists, computer consultants, and other independent service providers. The Single 401(k) can be setup for the business owner and any immediate family members that are also employed.  In a firm where there is an owner-employer and other full-time employees who are not immediate family, a Single 401(k) cannot be implemented. With a Single 401(k), the employer may make a deductible profit sharing contribution equal to 25% on the first $220,000 of compensation with a maximum of $44,000.  Salary deferrals equal to 100% of a person's compensation up to $15,000 (2006 limits) are also permitted.  Individuals age 50 or older can contribute an additional $5,000 catch-up contribution in 2006.  Together these contributions cannot exceed the lesser of $44,000 or 100% of compensation. (Catch-up contributions don't count when computing this limit.) Example. Joe Freelancer is the sole employee of an incorporated business. His salary is $100,000 for 2006. Under current tax law Joe can contribute $25,000 to a SEP-IRA, $13,000 to a Simple IRA ($10,000 employee deferral plus $3,000 employer match), $25,000 to a profit-sharing or money purchase plan and $40,000 to a 401(k)-$25,000 employer contribution plus $15,000 employee deferral. If Joe were over age 50, he could also make "catch-up" contributions of $5,000 in 2006, increasing his 401(k) contribution total to $45,000. It should be noted that contributions to a Single 401(k) plan are based on revenue generated by your business. If you participate in any other plan, with another employer, you must coordinate Single 401(k) contributions with that plan so you do not exceed the IRS contribution limits. Additional Features and Benefits

• Annual contributions are not required for a Single 401(k) plan. Each year the funding of the plan is completely discretionary.  You can increase or decrease your contributions accordingly.
• Minimal paperwork requirements, including exemption from discrimination testing (as long as you have no eligible employees). When plan assets exceed $100,000 or there are non-owner employees in the plan you may be required to file a form 5500 each year. The IRS provides a form 5500EZ that is ideally suited for Single 401(k) plans.
• Those with Single 401(k)s may borrow from the plan.  SEP plans and SIMPLE IRAs, popular retirement plans with small businesses, don't allow loans.

Setting up a Plan Like any 401(k) plan, the Single 401(k) plan requires a trustee to hold the assets on your behalf.  Many mutual fund companies have standardized plan documents available for small business owners. Fund companies typically charge a small one-time set up fee and perhaps a minimal annual maintenance fee. For more information, feel free to Contact Neptune Financial to schedule an appointment. We'll be glad to explain the different retirement plan options available for your business. Basic Understanding This blog is being provided for informational or educational purposes only. It does not take into an investment objectives or financial situation of any individual, family, prospect, client, or prospective clients. The information is not written or intended as investment advice and is not a recommendation about managing or investing your retirement savings. An individual seeking information regarding their investment or retirement needs should contact a financial professional. Neptune Financial, and their financial professionals do not render tax and legal advice. Please consult your tax and legal advisors regarding your personal tax or legal concerns.