Saturday, March 22, 2008

Self-employed retirement plan

Now that I am out on my own again, I need to set up some sort of retirement plan. I already have several Roth Rollover IRA accounts that I could make IRA contributions to, but I would like to get a formal plan set up to contribute more than $5,000 or $6,000 this year. Without going overboard, I could simply set up a SEP-IRA or a Self-employed 401(k) plan. The latter allows me to contribute more, but also requires annual paperwork filing.

If I understand the rules properly, if my compensation was $60,000 (working part-time), with a SEP-IRA I could contribute up to 25% or $15,000, but with a self-employed 401(k) I could contribute that same 25% plus another $15,500 plus another $5,000 catch-up contribution since I am over 50 or a total of $35,500.

Ah... I now read that your only have to file the annual IRS Form 5500 for a self-employed 401(k) after your plan assets exceed $250,000. Excellent.

And, I think I can still make a $5,000 or $6,000 IRA contribution as well. Have to check on that though.

One lingering question is whether either plan can be Roth, or whether it is all pre-tax money and I would be deferring income taxes.

 -- Jack Krupansky

2 Comments:

At 5:56 PM EDT , Blogger Retiring_with_a_Plan said...

A solo 401(k) is a great idea. You have complete contribution flexibility deciding each year whether to contribute and, even better, how much to contribute.
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Those limits are high but the maximum total contribution allowed to an individual 401(k) this year is $40,000; $42,000 if you are 50 or older. Your tax-deferred contributions can be up to three times as much as what's allowed under some other types of retirement plans.


And best of all, it is easy set-up and inexpensive to maintain but keep in mind, once your business expands - and isn't that the real reason we set out on our own, the switch might be more costly than you think.

So far, the Roth 401(k) is not available for solo savers.
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Consolidation convenience – You can consolidate assets from your traditional IRA or other retirement plans into your Self-Employed 401(k) .
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Access to cash via the 401(k) loan option - You can get a loan of up to the lesser of $50,000 or one-half of your Self-Employed 401(k) account balance. The loan can be used for any purpose and the loan is tax free and penalty free as long as it is paid back on time.

 
At 5:58 PM EDT , Blogger Retiring_with_a_Plan said...

A solo 401(k) is a great idea. You have complete contribution flexibility deciding each year whether to contribute and, even better, how much to contribute.


Those limits are high but the maximum total contribution allowed to an individual 401(k) this year is $40,000; $42,000 if you are 50 or older. Your tax-deferred contributions can be up to three times as much as what's allowed under some other types of retirement plans.


And best of all, it is easy set-up and inexpensive to maintain but keep in mind, once your business expands - and isn't that the real reason we set out on our own, the switch might be more costly than you think.

So far, the Roth 401(k) is not available for solo savers.


There is also the consolidation convenience where you can consolidate assets from your traditional IRA or other retirement plans into your Self-Employed 401(k) .

 

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