With Individual 401(k) participants may shelter up to $55,500 from taxes for each spouse.
Yorba Linda, CA (PRWEB) November 13, 2012
Sense Financial Services, California’s leading provider of retirement account with checkbook control, has seen an increase in the number of self-employed individuals using Individual 401(k) Plans as a vehicle for using their retirement accounts to invest in non-traditional assets such are real estate and mortgage notes.
Recent study, conducted by Sense Financial Services indicates that increasing number of self-employed individuals and small business owners are selecting Individual 401(k) rather than SEP IRA. One of the reasons is the larger contribution limit which allows contributions to the plan up to $55,500.
An Individual 401(k) is inexpensive to set up and easy to maintain – and it delivers substantial tax and saving advantages. Those who are self-employed or run an owner-only business can use an Individual 401(k) Plan. Multiple owners and spouse can be added to an Individual 401(k) Plan, but if full time employees added to the business - more traditional plan should be the option.
Solo Benefits, Duo Roles
One benefit of an Individual 401(k) is that the participant assumes the role of both employer and employee, which allows for a contribution of up to $50,000 ($55,500 for those 50-years or older) of the annual income, tax-deferred, for 2012. Contributing the highest amount may lead into a more advantageous tax bracket that accelerates the time to retirement – another benefit.
High Contribution Limit, tax advantages and penalty-free loans make the nominal price for a Individual 401(k) a wise financial move if a client wants to differ more of their income than the traditional IRA limit of $5,000 a year.
Up to now, many entrepreneurs have used traditional IRAs to save for retirement – a strategy which offers lower contribution limits and includes the risk of penalties incurred on owners who accessed funds before reaching retirement age. The Individual 401(k) presents more flexibility than about any retirement account, including IRAs.
Let’s compare Individual 401(k) with Traditional IRA:
- Limit Per Individual: $5,000
- Catch-up Contribution (Age 50+): $1,000
- Income Limit on Roth: $125,000*
- Tax-free, penalty free access: No
- Limit Per Individual: $50,000
- Catch-up Contribution (Age 50+): $5,500
- Income Limit on Roth: None
- Tax-free, penalty free access: Yes, loan
*Contribution amount for Roth IRA starts phasing out at $110,000 and not allowed if making $125,000 or more.
How to Save $10,000 in Taxes in 2012
Let’s look at the example how sole-proprietor younger than 50 years old, can max out his retirement savings and lower taxes for 2012:
- Earnings: $165,000
- Employee Contribution: $17,000
- Profit Sharing (20% of net self-empl.): $33,000
- Total Savings: $50,000
- Taxable Income: $115,000
While the owner earned $165,000 in 2012, only $115,000 is IRS taxable. Assuming an adjusted gross income tax rate of 20 percent, that’s $10,000 which can be saved (instead of paying Uncle Sam). What’s more, the savings are likely to be even greater because the tax bracket will probably drop. For example, the married filed joint return 2012 tax rate increases from 25% to 28% for income over $142,700.
Individual 401(k) Contribution Deadline:
While business owners will have until their tax deadline to contribute to their 401k accounts, IRS requires their plans to be set up by December 31 to qualify. Many providers have deadlines well before the 31st, so setting up sooner rather than later is the smart option.
Majority of businesses likely have until April 15, 2013 to make the contributions for 2012. However if company was established as a corporation, the deadline moves back to March 15. But don’t despair: by setting up a plan by the end of the year, participant will have time to determine the optimal amount to best manage his or her tax and retirement savings.
One final tip: If Individual 401(k) Loan and Roth options are important to client's investment strategy, then it is imperative to use a provider who offers a full-featured, totally self-directed Individual 401(k) plans such as Sense Financial. Some providers offer an individual 401 k plan with administrative services and few investment options from the array of investments they support. Such plans are not truly self-directed, limit investment options, not allowing non-traditional investments such as real estate and probably will lack Roth sub-account and loan feature of the plan.
Sense Financial is the California’s leading provider of retirement accounts with “Checkbook Control”: Solo 401(k) and Checkbook IRA. Over the years they assisted hundreds of clients obtain checkbook control over their retirement accounts while providing them the ability to invest in virtually any investment class, including real estate, private lending, mortgage notes and much more without the need for custodian approval!
To learn more about Individual 401(k) please visit http://www.SenseFinancial.com