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Still Time to Set Up Owner-Only 401 (K)

Posted October 24, 2012 in Advice Column, Beaverdale

If you’re a small-business owner with no full-time employees (except your spouse or business partner), you’re probably used to taking care of everything. So, if you’re thinking of establishing a retirement plan, you might be attracted to “going solo” with an “owner-only” 401(k).

An owner-only 401(k) has been around for a few years and has proven quite popular. This plan is easy to establish, easy to administer and gives you many of the same benefits enjoyed by employees of a company that offers a traditional 401(k) plan.

Benefits include:
 •    Tax deferred earnings. Your earnings aren’t taxed as they accumulate.

•  Tax deductible contributions. An owner-only 401(k) consists of two components — salary deferral and profit sharing contributions, both of which are generally 100 percent tax deductible. If you choose to make Roth salary deferrals to your owner-only 401(k), your contributions aren’t deductible, but you won’t pay taxes on your earnings, provided you don’t take withdrawals until you’re 59-1/2 and it’s been five years since your first year of Roth deferral.

 •    Variety of investment choices. You can choose to fund your owner-only 401(k) with a wide range of investments. You can construct an investment mix that’s appropriate for your risk tolerance and long-term goals.

An owner-only 401(k) can allow you to make greater contributions than other small-business retirement plans. You can defer up to $17,000, or $22,500 if you’re 50 or older (don’t exceed 100 percent of your income). You can make a profit-sharing contribution equal to 25 percent of your income (less if you are unincorporated). By combining the salary deferral and profit-sharing components, you can contribute up to $50,000 to your owner-only 401(k) in 2012, or $55,000 if you’re 50 or older. These figures are doubled if your spouse contributes to the owner-only 401(k).

You’re not obligated to contribute to your plan. If your business is slow one year, you might scale back contributions, or put in nothing at all. When business picks up again, you can contribute up to the maximum.

The owner-only 401(k) can offer you some key advantages in building resources for retirement. But it’s not the only small-business retirement plan on the market, so before you decide, consult with your tax and financial advisors to determine if an owner-only 401(k) is indeed right for you.

Don’t wait too long. You have to establish your owner-only 401(k) by Dec. 31 if you want to receive tax deductions for 2012. The sooner you put money away, the faster the progress you will make toward the retirement you’ve envisioned.

This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.

Information provided by Jim Talley, financial advisor at Edward Jones, 2703 Beaver Ave., 279-4179.

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