Owner-only Businesses Can Now Save Big-time for Retirement
If you're like me---and the more than 15 million other individuals in America who run a one-person business--- the opportunity to squirrel away thousands in qualified retirement plans has long favored larger companies. But now, thanks to changes in the tax laws, there's plenty of room for owner-only business people to save like crazy.
Complicated as it may be, the Economic Growth and Tax Relief Reconciliation Act of 2001, has given sole proprietors, partnerships, C corporations, and S corporations a wonderful gift: A 401 (k) for the owner-only business. ( A 401(k) is a salary deferral plan that prior to 2002 was not available to owner-only businesses).
What that means for the little guy is the chance to make more tax-deductible contributions into a qualified retirement plan than was ever possible to them before. On top of that, the cap on how much this plan allows them to invest is higher than those on other types of retirement plan options!
Debra Lavine is vice president of retirement plans at Pioneer Investments. Pioneer is the first fund family to offer a 401(k) plan package to the owner-only business community. The name of their product that does so is the Pioneer Uni-K Plan.
Lavine said that by offering 401 (k)s to people who run owner-only businesses means that they can now make both profit sharing and salary deferral contributions in one retirement plan."You benefit from the two types of contributions---the profit sharing one and the salary deferral contribution.---because if you just have a profit sharing plan, the limits on the amount of money you can contribute each year is lower," says Lavine.
Here's an example of what she means: In 2001, the most a business owner of an S corporation reporting $100,000 of income on a W2 could put into a profit sharing plan was 15 percent of his or her compensation. That's a maximum contribution of $15,000. In 2002, that same individual, who runs an owner-only business with $100,000 of income on their W-2, can make a profit sharing contribution of up to 25 percent of their pay---or a maximum of $25,000--- and then participate in a 401 (k) salary deferral plan. The limit for salary deferrals in 2002 is $11,000 for those under age 50 and $12,000 for those above.
Tally those numbers up and that owner-only business person could put as much as $31,000 into a plan like Pioneer's Uni-K Plan, if they are under age 50, or, $32,000 if they were older than 50. Then, depending upon their age ,$36,000 or $37,000, if their business is incorporated.
Being able to save a slew isn't the only advantage of the 401(k) for owner-only businesses. Vesting is immediate; you can roll monies from your other retirement plans into them; borrow money from them; consolidate your assets; and do so very inexpensively. For instance, the fees on Pioneer's Uni-K Plan are $100 per account per year.
If you're wondering who this retirement plan is best suited for, it will be all the owner-only business people you know like real estate agents, freelance writers or artists, computer and tech consultants or anyone considered an independent contractor and who gets paid on a 1099 Miscellaneous form at the end of the year. Who it's definitely not for are the business people who plan on growing their businesses and hiring more and more employees. It makes no sense for them.
To learn more about 401(k)s for owner-only businesses, consult your broker or financial advisor. To learn more about Pioneer's Uni-K Plan, call 800-622-0181, or visit their website at: www.pioneerfunds.com.
Dian Vujovich is a nationally syndicated mutual fund columnist, author of a number of books including Straight Talk About Mutual Funds (McGraw-Hill), and publisher of this web site.
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