With all the procedures involved in just keeping things going, retirement planning often gets put aside. Even when the need for a retirement plan does end up front and center, it appears that the 401K is not often thought of even though specialized Solo 401K and IndividualK plans are available. It is often believed that 401Ks have relatively low limits on contributions and are, in any case, really only suitable for bigger businesses.



However, changes to the original law made by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) have made the choice of a Solo 401K or IndividualK plan a valuable addition to your retirement plans as well as a means to substantially reduce your tax bite as a self-employed person.

When you read up on the contribution limits for 401Ks, the information can be less than explicit and sometimes is not all in the same place. This leads most of us to think that the maximum contribution for 2007 is $15,500, plus, if you are over 50 a possible additional $5000 catch up contribution. There is actually a bit more to it than that. An employee can also receive a 401K contribution made by the company. However, it may not be clear how this can work for you as an entrepreneur.

As an employee, you are entitled to make this $15,500 "elective salary deferral." Beyond the salary deferral, as an incorporated business you can give yourself a "profit-sharing" contribution at the maximum rate of 25% of eligible pay. And there is no deduction for the amount of the salary deferral. The profit-sharing contribution for an unincorporated business follows a somewhat more unfavorable rule since the 25% is based on net self-employment income. Essentially this means that you would need to deduct any elective salary deferral and any catchup contribution which would reduce the maximum profit-sharing amount.

Whichever case applies to your business, a Solo 401K can help you put away a significant part of your earnings. Since the contributions and the interest or other earnings from the 401K are not taxed until withdrawn, you also can substantially reduce your tax liability.

For a little further clarification on the limits related to 401K, we have some more number soup. The $15,500 2007 and 2008 limit on the elective salary deferral is known as the 402g limit. Unsurprisingly, that is the section that specifies that limit. Since this limit is indexed to inflation, it may increase as may the catchup contribution. Both increase in $500 steps. Now, the actual, total possible contribution adding in both the employee and employer contributions is set by section 415. Section specifies the 2007 limit to be the lesser of $45,000 (plus the catchup contribution) or 100% of the employee salary. This will increase for 2008 to a maximum of $46,000 plus the catchup if it applies.

A nice feature of the Solo 401K is that they can be set up as self-directed 401Ks. This would allow you basically total control over your contributed funds in terms of how they are invested. Essentially, with this sort of setup you can invest in nearly anything. With the investment options available and the capability of making substantial pre-tax contributions, investigating how a Solo 401K or IndividualK could be integrated into your planning for retirement makes a great deal of sense for an entrepreneur.