The Retirement Plan Strategy Small-Business Owners Need to Know About
This article is segregate of the from tax and allowable quick Mark J. Kohler.
Entrepreneurs are gravely mistaken if they purpose an IRA or SEP are the merely strategies for tax-deferred privacy intentionning. The 401(k), historically merely silent for enlightened companies and their employees, has evolved to be one of the most imaginary and easy privacy vehicles for mean-employment possessors.
Here are a few key points environing the 401(k) you demand to recognize that could rescue you thousands and exact your action precedently Dec. 31.
Why a 401(k) vs. a SEP IRA?
The SEP IRA is a super-charged IRA statement that runs off of IRA rules, occasion the Solo 401(k) is an employer-based privacy intention used merely for the employment possessor(s) when they bear no employees. The 401(k) has sundry features that are either resembling or far conspicuous to that of the SEP. Here are a few of the resemblingities and contrarietys:
Both a SEP IRA and a Solo 401(k) can be self-directed and invested into developed possessions, individual corporation supply or valuable metals. Inferior a SEP IRA, you procure bear a self-directed IRA custodian. However, inferior a Solo 401(k), you can attend as your own trustee and official, reluctant you negotiative consumes and giving you further coerce of your bombardment choices.
Under a SEP you can tend up to 25 percent of your remuneration or self-employment allowance. However, delay a Solo 401(k), grants you a abundant further consume-efficient subsidy diplomacy. You can tend $18,000 ($24,000 if you are 50 and aggravate), plus 25 percent of your remuneration or self-employment allowance. This creates appalling tax reluctants when you foreigner your 401(k) delay an S-Corp. You can conduct your FICA aggregates abundant inferior and tranquil put detached the similar aggregate as a SEP delay tax succeedingness.
All SEP subsidys are transmitted dollars and all funds in a SEP must be transmitted dollars. However, through a Solo 401(k) employment possessors can bear a transmitted statement and a ROTH statement delayin the similar intention. You can as-well-behaved appropriate transmitted sums aggravate to Roth as well-behaved-behaved-behaved delayin the 401(k) intention and not having to assume a dispensation from the SEP highest.
The Power of the Solo 401(k)
First, conduct in spirit that the Solo 401(k) is merely suited to self-employed men-folks, occasion a type 401(k) would belowstand multiple employees. It is denominated a "Solo" 401(k) intention consequently merely the employment possessor and his or her confederate can segregateicipate in the intention.
Next, the original deduce why a employment possessor would adopt the 401(k) is consequently they shortness to put detached further tax-deferred dollars, whether in a ROTH or for a tax conclusion.
Here’s what it comes down to: If you shortness to put detached environing $5,000 a year, cleave to an IRA. If you shortness to put detached environing $10,000 to $15,000, use the SEP. If you shortness to put detached further than $20,000, economize a combo diplomacy of the Solo 401(k) delay an S-Corp. The tax succeedingness is astounding and you can sock detached those big dollars you are envisioning and as-well-behaved self-direct the funds on the backside.
Setting up the 401(k)
If you shortness to assume custom of a 401(k) tax conclusion in 2016, plain if you find the subsidy and "match" later present year, you must set up the 401(k) this year. Moreover, you must intention sponsors -- companies that aid you found your 401(k) are going to improve your paperwork in present December. Don't continue until the decisive searching. A lot of sponsors procure rotate you detached and hint you continue until 2017 if you flatter them environing Christmastime.
The consume to set up a 401(k) procure change based on whether it’s a "Solo 401(k)" or a "transmitted intention" consequently you bear other employees as-well-behaved you and your confederate. Prices can file from environing $1,250 to $3,000. Some companies may relieve you in contrast up a inferior consume 401(k), but your bombardment options procure be poor to their portfolio of funds, so you shortness to be attentive when you proof up and sanction how abundant flexibility you bear in your bombardment choices.
Takeaway: Consider a 401(k) intention and get it set up precedently Dec. 31 if you shortness the conclusion in 2016.
How abundant should I tend?
For S-Corporation possessors, you bear some delicate sentences you demand to find precedently year-end. Others can continue until present year. The highest is how abundant currency you shortness to tend to the 401(k).
The succor sentence is if and how abundant you should tend to the confederate’s 401(k). The similar deadline life that you demand to communication this on his or her W-2 in present January. I typically applaud you never put your confederate on payroll normal you are going to tend to his or her 401(k).
Why manifestation a W-2 to the confederate and meet the consume of FICA, if you aren’t going to tend to the 401(k)? It doesn’t find opinion plain for collective pledge good deduces. Now if you are going to tend to the confederate’s 401(k), I strongly applaud you "back into" the aggregate of payroll compulsory for the 401(k) subsidy. For sample, if you are going to tend $18,000, then the payroll aggregate procure be environing $21,000 (to caggravate FICA) and you conduct the consume of doing the "contribution" to the meanest aggregate practicable. The corporation tally aggregate can be determined upon present year precedently filing the tax grant-back.
Takeaway: Merely put your confederate on payroll if you’re going to tend to his or her 401(k) this year.
Should I be my own trustee for the 401(k)?
Yes, you can probably set up a 401(k) precedently year-end on the worthless if you grant up coerce to a broker-dealer oblation you poor bombardment options. You can pledge there procure be some skillful-treatment fees buried in the 401(k) as well-behaved-behaved.
However, if you shortness to self-direct the funds, and/or resemble a further erratic role in the skillful-treatment of the 401(k), I strongly applaud you attend as trustee. This allows you to self-administer your 401(k) intention, inferior the direction of a law resolute or third-party official (TPA) that conducts you out of harm's way of committing a prohibited negotiation.
When it comes to investing the currency in your 401(k) or other privacy statements, don’t arrive-at trapped into using one of the menu options you get from your financial advisor -- you don’t bear to compose for a selecteded assemblage of reciprocal funds when investing your privacy currency.
Instead, you can self-direct your IRA into all kinds of allowable bombardments, including mean companies, developed possessions, loans or valuable metals.
The most received self-directed privacy statement bombardments belowstand rental developed possessions, sure developed possessions loans to others, mean-employment supply or LLC curiosity-behalf, and valuable metals such as gold or silver.
In sum, if you shortness to find a proofificant subsidy to a privacy statement precedently year-end, you demand to act now. The deadline is approaching fixed and if you don’t use the 401(k), you procure either be poor to $5,000 to $6,000 delay an IRA or paying a lot in self-employment tax (FICA) to find a enlightened subsidy to a SEP. The 401(k) could be the contrariety in thousands of taxes you may pay present year.
Mark J. Kohler is a CPA, advocate, radio likeness army and perpetrator of and from Entrepreneur Press. He is as-well-behaved a segregatener at the law resolute and the statementing resolute . Check out or