In our discussion on the
Individual 401(k) Plan I promised to give an example of how it works. Keep in mind this plan suits a sole proprietor
with no employees.
Matt M. owns a growing
printing and engraving company and now in his mid- forties is concerned he has
done nothing for his retirement. He
does not even have an IRA. He’d like to
start and feels he could comfortably do more than the current IRA limits of
$5,500. We discussed and did some numbers
on a Solo 401(k). The money to invest is coming from a savings account earning a fraction of 1%,.20% to be exact.
Matt currently earns
$80,000 a year. The plan proposed to Matt
would let him invest and deduct from his income 25% of his $80,000. A good point to keep in mind is that Matt’s
wife Kathy is also employed. So this
would give him a tax-deduction of $20,000 (25% of the annual salary of
$80,000). This represents the Profit
Sharing Component. Next Matt takes an
elective deferral of another $18,000.
This is the main section of his 401(k) plan. The end result is that he can shelter $38,000
of his income for retirement.
Matt not only saves $9,500
in taxes, but he and his wife are
now on their way to building a nice retirement plan. He also meets the IRS maximum limit which
says you cannot invest more than $53,000 in any taxable year (2016). There are no cumbersome federal rules to
comply with and he is not committed to investing the same amount every
year. He can even skip a year or two or
even do something less than the current $38,000.