If you’re a business owner with no employees, you probably have
considered the 401(k) plan an unsuitable retirement plan for a
small company such as yours. With recent tax law changes, you may
want to give the 401(k) another look. A solo 401(k) retirement plan
can offer a profitable one-person business larger contributions and
tax deductions than other traditional retirement and profit-sharing
plans.
If you’re a business owner with no employees, you probably have considered the 401(k) plan an unsuitable retirement plan for a small company such as yours. With recent tax law changes, you may want to give the 401(k) another look. A solo 401(k) retirement plan can offer a profitable one-person business larger contributions and tax deductions than other traditional retirement and profit-sharing plans.
For example, other one-person plans allow one contribution, either a percentage of adjusted self-employment income for sole proprietors or a percentage of owner’s compensation when the owner is an employee of his corporation.
The solo 401(k) plan allows two different contributions, the elective deferral contribution and the employer contribution. The elective deferral contribution amount for 2004 allows a one-person employee-owner to contribute up to $13,000 of adjusted self-employment or compensation income to a solo 401(k) plan. The limit is higher if the owner is age 50 or older.
The employer contribution can be up to 20 percent of adjusted self-employment income for the sole proprietor or up to 25 percent of owner’s compensation for the corporation. The sole proprietor is considered to be his or her own employer for purposes of this tax deduction. The corporation makes the deductible contribution for the owner-employee of a one-person corporation.
Although traditional retirement plans and the solo 401(k) have similar maximum contribution limits, using the two contributions under the solo 401(k) plan may generate a larger deduction on less income than with other plans. Age, timing, your future business plans and the amount of your adjusted self-employment income or employee compensation are all important factors affecting retirement planning.
Kerry Lorincz is a CPA and a partner with the accounting and business consulting firm of Bianchi, Lorincz & Company located in downtown Hollister.
