Internet marketers are gravely mistaken if indeed they think an IRA or SEP will be the only approaches for tax-deferred old age planning. The 401(k), historically only reserved for large companies and their employees, has progressed to be one of the very most creative and adaptable old age vehicles for small-business owners.
Here are some key points about the 401(k) you should know that could save you thousands and require your action before Dec. 31.
Why a 401(k) vs. a SEP IRA?
The SEP IRA is a super-charged IRA account that runs off of IRA rules, as the Single 401(k) can be an employer-based retirement plan used solely for the business owner(s) when they haven’t any employees. The 401(k) has several features that are either similar or significantly more advanced than that of the SEP. Here are some of the similarities and differences:
Both a SEP IRA and a Single 401(k) can be self-directed and invested into real estate, private company stock or valuable metals. Under a SEP IRA, you’ll have a self-directed IRA custodian. However, under a Single 401(k), you can help as your own trustee and administrator, helping you save administrative costs and providing you more control of your investment alternatives.
Under a SEP you can contribute up to twenty five percent of your salary or self-employment income. However, with a Single 401(k), provides you a more cost-efficient contribution strategy. You could contribute $18,000 ($24,000 if you are 50 and over), plus 25 percent of your salary or self-employment income. This creates huge tax personal savings when you couple your 401(k) with an S-Corp. You will keep your FICA quantities much lower and still put away the same amount as a SEP with duty efficiency.
All SEP contributions are traditional us dollars and all cash in a SEP must be traditional dollars. However, by way of a Solo 401(k) companies can have a traditional profile and a ROTH accounts within the same plan. You can even convert traditional amounts over to Roth as well within the 401(k) plan and not having to take a distribution from the SEP first.
THE ENERGY of the Single 401(k)
First, retain in brain that the Single 401(k) is only open to self-employed persons, while a typical 401(k) would include multiple employees. It really is called a “Single” 401(k) plan because only the business enterprise owner and his / her spouse can take part in the plan.
Next, the primary reason a business proprietor would choose the 401(k) is because they would like to set aside more tax-deferred us dollars, whether in a ROTH or for a duty deduction.
Here’s what it boils down to: If you want to set aside around $5,000 per annum, adhere to an IRA. If you wish to set aside around $10,000 to $15,000, use the SEP. If you want to set aside more than $20,000, start using a combo strategy of the Single 401(k) with an S-Corp. The taxes efficiency is amazing and you could sock away those big us dollars you are envisioning and also self-direct the money on the backside.
Establishing the 401(k)
If you want to take benefit of a 401(k) tax deduction in 2016, even if you make the contribution and “match” later next time, you must setup the 401(k) this year. Additionally, you must plan sponsors — companies that help you establish your 401(k) will data file your paperwork in early on December. Don’t wait until the last minute. A whole lot of sponsors will flip you away and suggest you wait until 2017 if you call them around Christmastime.
The cost to set up a 401(k) will change predicated on whether it’s a “Solo 401(k)” or a “traditional plan” because you have other employees besides you as well as your spouse. Prices can range between about $1,250 to $3,000. Some companies may help you in setting up a lesser cost 401(k), however your investment options will be limited by their stock portfolio of funds, which means you desire to be careful when you sign up and confirm how much overall flexibility you have in your investment selections.
Takeaway: Look at a 401(k) plan and obtain it create before Dec. 31 if you want the deduction in 2016.
How much should I contribute?
For S-Corporation owners, you involve some critical decisions you will need to make before year-end. Others can hold out until next time. The foremost is how much cash you want to donate to the 401(k).
The second decision is if and how much you should donate to the spouse’s 401(k). Exactly the same deadline being that you’ll require to article this on his / her W-2 in early on January. I typically recommend you never put your spouse on payroll if you don’t will contribute to his / her 401(k).
Why concern a W-2 to the spouse and incur the price of FICA, if you aren’t heading to contribute to the 401(k)? It doesn’t seem sensible even for communal security benefit reasons. Now if you will contribute to the spouse’s 401(k), I strongly suggest you “back into” the quantity of payroll essential for the 401(k) contribution. For instance, if you are going to contribute $18,000, then your payroll amount will be around $21,000 (to pay FICA) and you retain the price of doing the “contribution” to minimal amount possible. The Small Business Retirement Plans match amount can be decided upon next time before filing the duty return.
Takeaway: Only put your spouse on payroll if you’re going to donate to his / her 401(k) this season.
Should I be my own trustee for the 401(k)?
Yes, you often will create a 401(k) before year-end on the cheap if you quit control to a broker-dealer proclaiming to offer you limited investment options. You are able to guarantee there will be some management fees buried in the 401(k) as well.
However, if you want to self-direct the money, and/or play a more active role in the management of the 401(k), I strongly suggest you serve as trustee. This enables one to self-administer your 401(k) plan, under the information of an attorney or third-party administrator (TPA) that retains you out of harm’s way of committing a prohibited transaction.
When it comes to investing the amount of money in your 401(k) or other retirement accounts, don’t feel captured into using one of the menu options you get from your financial advisor — you don’t have to settle for a select group of mutual funds when investing your retirement money.
Instead, you can self-direct your IRA into all types of legal investments, including small companies, real property, loans or precious metals.
The most popular self-directed retirement account investments include rental real estate, secured real estate loans to others, small-business stock or LLC interest, and treasured metals such as gold or silver.
In sum, if you need to make a significant contribution to a retirement account before year-end, you need to do something now. The deadline is approaching fast and if you don’t use the 401(k), you will either be limited by $5,000 to $6,000 with an IRA or paying a whole lot in self-employment tax (FICA) to make a sizable contribution to a SEP. The 401(k) may be the difference in a large number of taxes you may pay next year.