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A small business blog featuring tips to help entrepreneurs succeed in the small business world. Topics include family business, human resources, marketing, money, networking, operations, ownership, startup, taxes and technology.
Retirement for the Sole-Proprietor
When you go solo and start your own small business, it can often be hard to save for retirement. Yes, there are options like Roth IRAs, but as your business grows, the maximum contribution of $5,000 doesn’t always seem to be the best option.
Additionally, savings accounts have a meager return on the precious funds you’ve worked so hard to earn. Wouldn’t something like a 401(k) plan that many corporate employees get to take advantage of be nice?
Well, cheer up because the option is out there. In fact, it has been since 2001, but only now are sole proprietors becoming more aware of it’s benefits as the kinks have been ironed out. It’s called a “solo 401(k)” (a/k/a “solo k,” a/k/a “uni-k“). This retirement option is strictly limited to sole proprietors without employees.
With a uni-k, you can contribute funds one of two ways: 1) pretax, with funds growing tax deferred but taxed upon withdrawal or 2) an after-tax contribution, with funds growing tax free and nothing paid upon withdrawal. It seems obvious to me which is the better choice (#2), since you never know what tax rates will be twenty years from now.
You may be wondering just how much you can contribute to a uni-k. Well, that’s the best part. Individually, you can contribute up to $45,000 a year, which is comprised of $15,500 max as your own employee plus up to 25% more as the sole proprietor/employer. Additionally, if your spouse gains an income from the business, he/she can contribute the same, for a total yearly maximum of $90,000! Not bad.
One should be aware of the red tape that comes along with a uni-k. There is more paperwork that the more common SEP (self-employed) IRAs and, when your uni-k account grows to a value of $100,000 or more, you are required to file a special tax return for the account. Additionally, most of the providers of uni-k accounts charge a hefty setup fee ($100-375) and annual maintenance fees ($10-250). If you ask me though, the cost and extra work is worth it to save that much cash per year. Ocean-front retirement home, here I come!
To locate a provider, check out the 401(k) Help Center. Be aware that not all providers offer the Roth option (contribution type #2), but it’s only a matter of time before they all do.
• CNNMoney.com: Finally a 401(k) plan just for one
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