IRA vs 401k An Amazingly Simple Small Business Retirement Plan Decision

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					IRA vs 401k: An Amazingly Simple Small Business Retirement Plan Decision
The question of IRA vs 401k leaps to mind when setting up a small
business retirement plan. Do you know the differences between plans? What
does the Internal Revenue Code allow and restrict? Why should you even
care? Because if you sell fixed indexed annuities and want to capitalize
on one of the hottest specialty markets going today (setting up
retirement plans for small business owners with 1 to 9 employees), you'll
want to brush up on IRA vs 401k and other important considerations.
First, consider that a small business retirement plan, now more than
ever, is the best way to defer large amounts of tax-deductible dollars.
Thanks to the Economic Growth and Tax Relief Reconciliation Act of 2001
(EGTRRA), self-employed taxpayers now have unprecedented incentives to
save for retirement. A business owner's decision is quite literally
whether to keep company profits... or send them off to Uncle Sam.
It’s no secret the allure of a small business retirement plan is directly
related to benefits available to the owner. The greater the owner’s share
of the overall plan, the greater the interest. Before the new tax
legislation, restrictions on owner’s benefits in small plan design often
resulted in even fewer benefits for the employees. But the tools are now
in place to ratchet up the owner’s benefits and still create a workable
plan for the employees. So, should the plan be an IRA or a 401k? Let's
examine IRA vs 401k separately.
The simplest small business retirement plan for self-employed taxpayers
and the easiest to set up and maintain is the Simplified Employee Pension
(SEP). You may establish a SEP if you earn self-employment income,
regardless of whether you have employees. A SEP is an Individual
Retirement Account (IRA) and if maintained for more than one person
becomes a group of IRAs.
All contributions to a SEP are tax deductible as a business expense. As
an IRA the plan’s earnings are not taxed until they are withdrawn at
retirement. As usual, withdrawals prior to age 59 ½ with this and other
plans incur a 10% penalty. A SEP-IRA does not permit loans or salary
deferral contributions. Also, the individual annual contribution limit
for 2006 is the lesser of 25% of compensation or $44,000, and
contributions may be reduced or skipped altogether in lean years.
Another handy tool in the EGTRRA toolbox is the Individual or Solo
401(k). This small business retirement plan is ideally suited for
businesses in which the owner or owners (and their spouses if working at
the business) are the only employees. The biggest reason for opening a
one-person 401(k) is the higher contribution limits allowed, plus the
fact that contributions are based on revenue generated by the business.
The maximum tax-deductible employer contribution is 25% of gross eligible
payroll. For 2006 the maximum effective salary deferral contribution for
employer plus employee is $44,000 plus a catch-up contribution of $5,000
for individuals age 50 and over. Loans are permitted subject to limits
and rules, and paperwork may be just a filing of the streamlined IRS Form
5500-EZ when plan assets exceed $100,000.
The new tax law creates a multitude of opportunities with more than 60
new provisions to strongly encourage the startup and funding of your
small business retirement plan. Variations in plan design allow
opportunities to suit independent contractors, sole-practitioner
professionals, small retail owners -- virtually every type of small
business imaginable. Answer the question of IRA vs 401k and you're on
your way.
For small business owners in search of large tax breaks, it doesn’t get
any better than this. There has never been a better time than right now
to convert current taxes into assets, defer tax payments, and generate
large amounts of retirement income. And for you as the fixed indexed
annuity specialist, this market is virtually untapped. Gary Le Mon is a wholesale
distributor of fixed indexed annuities for Allianz, American Equity, Sun
Life Financial, and ING. Author and developer of the Safe Money Seminar,
a financial planning seminar for Seniors, Gary serves as guest speaker on
behalf of agents and agencies nationwide. He is coach, mentor and
motivator to over 700 general agents in his insurance marketing
organization, InsuranStar Marketing. See also Insurance-Lead-