For many entrepreneurs running a sole proprietorship, retirement planning tends to get lost among the day-to-day details involved in running the business. Even when the thought does make it to the surface, the business person rarely considers the possibilities of a 401K despite the availability of what are known as Solo 401K or IndividualK plans. Many mistakenly assume that 401Ks are only suitable for larger businesses and have relatively low contribution limits. However, changes to the original legislation made by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) have made the adoption of a Solo 401K or IndividualK plan a potentially highly valuable addition to your retirement package as well as a means to substantially reduce your tax bite as a self-employed person.

Reading most information about 401Ks will lead you to believe that the contribution limit for 2007 is $15,500 (plus an additional $5000 if you are over 50 and therefore qualify for a "catch up" contribution). This, however, is only part of the story. As you may know, a company can also make a contribution to a 401K on behalf of an employee. What you may not realize is how this plays out for you if you are self-employed.

The $15,500 is referred to as an "elective salary deferral." If your business is incorporated, you can also make a "profit-sharing contribution of up to 25% of your eligible pay without any deduction for the salary deferral. If you are unincorporated, the rule is slightly less favorable and limits you to a 25% profit-sharing contribution on net self-employment income which means the $15,500 (plus, if applicable the additional $5000) salary deferral would reduce your net income.

In either case, you will find that a Solo 401K will allow you to save a substantial amount toward your retirement. Since the contributions and the interest or other earnings from the 401K are not taxed until withdrawn, you also can substantially reduce your tax liability.

There are, naturally, other contribution limits involved. The 2007/2008 limit of $15,500 for the elective salary deferral is called the 402g limit. The limit is indexed to inflation and is adjusted in $500 increments. The same holds true for the catch up limit which is currently set at $5000. The section 415 limit sets the total amount that can be contributed adding together the employee, or elective salary deferral, and the employer, or profit-sharing, contributions. For 2007 that limit is set as the lesser of 100 per cent of the employee's salary or $45,000 (plus, if it applies, the $5000 catch-up). In 2008, the section 415 limit increases to $46,000.

Since Solo 401K or IndividualK plans can be structured as self-directed 401Ks, they permit investment in almost anything from tax liens, real estate and mortgages to stocks, bonds and CDs. With the potential for making fairly sizeable tax free contributions and the investment latitude permitted, any self-employed person would do well to look into how a Solo 401K or an IndividualK plan would fit into their retirement planning.

Focused on retirement planning and options, 401K-and-IRA.com provides retirement and 401K plan information as well additional information on the Solo 401k and IndividualK rules.

Source: www.articledashboard.com