On Monday, I posted a brief overview of tax considerations when dealing with a retirement account conversion. The tips came from Jim Wagner, of TAS (Trust Administration Services). Today I have one more tip that I’d like to share from him. It deals with the benefits of a solo 401k for the self-employed. As someone who is self-employed — and currently has only a Roth IRA — I found this information on the solo 401k very helpful:
The Solo 401(k) has higher contribution limits and allows tax-deductible 401(k) salary deferrals to the plan of up to $16,500 for 2009 and should be examined as an investment opportunity for self-employed individuals. These plans allow self-employed individuals or business owners with no employees other than a spouse to defer more of their income while aggressively saving for retirement. Individuals age 50 or older can also make an additional catch-up salary deferral contribution of $5,500 for 2009.
And business owners can make tax-deductible profit-sharing contributions up to 25% of compensation, with an annual maximum of $49,000 for 2009. Differences between the maximum contributions for other plans, like the SEP IRA, can be substantial. A self-employed business owner, age 50 with $100,000 in compensation, may save up to $20,000 more with a Solo 401(k) than with the traditional SEP-IRA or profit sharing plans.
Additionally, the Solo 401(k) allows participant loans, unlike its predecessors. Tax-free loans are acceptable in a Solo 401(k) up to 50% of the total 401(k) value with a maximum of $50,000. In addition to investing in stocks and bonds, and as with a traditional IRA, individuals with SOLO 401K can also invest in alternative assets, such as private stock, real estate, tax liens, in these plans.
What would be especially interesting to me, personally, though, is how this compares with a solo Roth 401k. Because if I could get Roth benefits on top of all of this, I would be thrilled.
Wagner is president and chief executive officer of TAS (Trust Administration Services) online at www.trustlynk.com