Are you a sole proprietor looking for retirement savings options? Are you aware of the fact that you can have an individual 401K account to save for your future?
Usually, small company owners are told to open an IRA account to save for retirement; but the independent 401(k) — also known as the solo-k or uni-k has several additional benefits than those offered by an IRA.
The main benefit of a 401(k) is that you can contribute a lot more than a traditional IRA. The yearly limit for an IRA is $5,500 or $6,500 if you are age 50 or older. A 401(k) will allow you to give 100% of your annual salary, to a maximum of $17,500, and a limit of $24,000 if you are over 50. You can also contribute some of your business salary as well as part of the business proceeds as an employer contribution. If you are self-employed, you might have to make additional calculations when calculating the maximum amount allowed as an employer and possible tax deductions, which are affected by your net profit and employment tax. As of 2016, the largest amount allowed for any 401(k) account is $53,000, not including catch-up amounts.
A great benefit of the individual 401(k) is that it allows the person contributing to take out a loan – which isn’t available with a traditional IRA. The individual can loan themselves up to 50% of the balance or $50,000. This may be a better option than a bank loan because you have up to 5 years to repay the funds, and the principal and interest go right back to the retirement account.
Lastly, if you think you might be in a higher tax bracket when you retire, an individual 401(k) might be good for you as it could help you save more. A Roth IRA allows after-tax contributions meaning that when you receive the money it’s not taxed because you already paid the tax. If you land in a higher tax bracket upon retirement, this could save you lots of money. All IRAs have the same limit cap but an Individual Roth 401(k) gives the option of saving close to 10 times more of after-tax contributions. For more information or to open your individual 401(k), visit your bank or credit union.
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