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    401k Retirement Plans for Self Employed (Solo) Persons

    If you own a small business where you are the employee or you and your spouse manage the business, then a solo 401k self employed retirement plan is a good retirement choice. Thanks to the Tax Relief Act of 2001, owners of self employed or solo 401k plans have the following advantages:

    1) 100% Contribution Choice: You can contribute however much you want per year.

    2) Higher Contribution Limit: You can contribute more funds than any other 401k account e.g a Roth IRA, traditional 401k, etc.

    3) No maintenance: Solo 401k accounts are very easy to start up and do not require the services of a 401k administrator (which can be costly).

    4) 401k Loan Service: If you need money for an emergency, you can take out a 401k loan of a maximum of $50,000 (or 1/2 of your solo 401k account reminder balance).

    Characteristics of a Solo or Self Employed 401k Account

    - Any type of business, whether a sole proprietorship (1 owner), partnership (multiple partners) or corporations (lots of shareholders) can open a solo 401k account.

    - In order to be eligible for tax deductions in example the year 2005, you must setup the 401k account within that year (December 31st), no later.

    Payments & Contributions to a Solo 401k Account

    You can make contributions to your solo 401k account in 2 different contribution payments:

    Contribution System 1
    Contribution System 2

    -> 100% of the first $15,000 of your annual self-employment wage

    -> Plus a catch-up contribution of $5000 more if you are 50 or more years old

    -> Contribute an additional 25% of annual wage

    -> Or 20% of self-employment income

    Hypothetical Solo 401k Investor Examples (for 2006)

    1) Corporate Employee

    Imagine the company you work for paid you $90,000 this year as your compensation.

    Contribution System 1
    Contribution System 2

    -> 100% of the first $15,000 of your annual self-employment wage
    = $15000

    Total Contributions = $15,000 + $22,500
    Total Contributions = $37,500

    -> Contribute an additional 25% of annual wage
    = 25% x $90,000
    = $22500

    If you are more than 50 years old, you are allowed a further 401k catch up contribution limit of $5000. Therefore, your total contributions for 2006 would be $37,500 + $5000 = $42,500

    2) Sole Proprietorship

    Contribution System 1
    Contribution System 2

    -> 100% of the first $15,000 of your annual self-employment wage
    = $15000

    Total Contributions = $15,000 + $18,000
    Total Contributions = $31,000

    -> Contribute an additional 20% of self-employment income.
    = 20% x $90,000
    = $18,000

    If you are more than 50 years old, you are allowed a further 401k catch up contribution limit of $5000. Therefore, your total contributions for 2006 would be $31000 + $5000 = $36,000

    Here's a graphical representation of the above data:

     

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