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Home › Posts tagged Income tax

Income tax

A Solo 401(k) Plan Can Cut Your 2011 Tax Bill by $9,800. But Need to Act Soon.

Posted on November 11, 2011 by Tony — No Comments ↓
Plot of top bracket from U.S. Federal Marginal...
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Self employed individuals must act very soon to take advantage of this deduction for 2011.

Solo But Duo RolesOne of the great advantages of a Solo 401(k) is the ability to play the roles of both employer and employee, enabling the owner to contribute up to $49,000 of his annual income tax-deferred in 2011 (or $54,500 if at least 50 years of age).  That’s a generous amount that might even drop the owner into a more advantageous tax bracket that can fast track the owner’s time to retirement.

The high contribution limits, tax savings and easy access to cash via penalty-free loans make the nominal price for solo 401(k)s a savvy financial move for any owner-only business that wants to save more than $5,000 a year (the traditional IRA limit).

In the past, many owner-only businesses have turned to traditional IRAs as a retirement savings strategy – an approach that, compared to a Solo 401(k), provides much lower contribution limits (not to mention penalties if the owner needed to access the money before reaching retirement age).  Solo 401(k)s also offer more flexibility than about any retirement option.  For example, just compare a 401(k) to a traditional IRA:

401(k)

Traditional IRA

Annual Limit per Individual

$49,000

$5,000

Age 50+ Catch-up Amount

$5,500

$1,000

Roth Income Limit

None

$120K*

Penalty-free Access

Yes, loan to self

No

via forbes.com

The solo 401(k) is more affordable than most self employed people realize.

Please comment or call to discuss how this affects you for 2011 and beyond.

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Posted in 401k Solutions, Retirement Savings, Tax Deductions
Tagged with 401(k), Employment, Income tax, Individual Retirement Account, Retirement, Roth IRA, Tax bracket, Traditional IRA

Leakage from 401(k) Plans.

Posted on October 26, 2011 by Tony — No Comments ↓
Seal of the Internal Revenue Service
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Loans from a company 401(k) plans should be strongly discouraged. Your retirement plan is not intended to be your emergency fund. The future of you and your family will be adversely affected.

CM:How do loans affect participants?OM: A plan loan is capped at half the account balance or $50,000, whichever is less, and the employee must immediately begin repaying the loan to him/herself. Failure to pay back, for instance, at job termination, results in the unpaid loan amount being subject to income tax (as well as a penalty tax if the individual is younger than age 59-1/2).

According to Employee Benefit Research Institute (EBRI) research, 21% of partcipants have plan loans with an average loan balance of 15% of total assets, or $7,346.** A Vanguard report from earlier this year indicates participants with no loans have balanaces that are, on average, 12% larger that those with loans. ***

What is worrisome is the loss of a significant portion of a participant’s balance as repayment for a loan at retirement. With balances already considerably less than those without loans, most can’t afford any “leakage”.

CM: What about plan distributions when leaving an employer… do most roll it over to an IRA or new plan, or do they just cash out?

OM: Someone who takes a plan distribution in the form of cash prior to the age 59-1/2 will have to include the payment in reported income for the purposes of income tax, plus pay to the IRS an additional penalty of 10% of the lump sum (only the income tax applies after age 59-1/2). If the plan distribution takes the form of a rollover to an IRA, or to a new employer pension, the income and penalty tax is not charged.

The Vanguard study cited earlier shows 30% of those leaving an employer cash out their 401(k) balance.

via promanageplan.com

Steps can be taken to control the ‘leakage’ or loan program in your plan.

Please comment or call to discuss how this affects you and your organization.

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Posted in 401k Solutions, Retirement Savings
Tagged with Employment, Income tax, Individual Retirement Account, Internal Revenue Service, Loan, Retirement, Tax
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