You might be thinking that it's a little early to be talking about tax season. But everyone knows that when Santa's coming down the chimney, the tax man is walking up the path to the door, figuratively speaking.
In that vein, a tip that could help you plan for retirement and save on taxes at the same time can't be all bad. And that's what's in store for the small-business owner who opts for a solo 401(k) plan.
Surprisingly, there are more than 9 million small-business owners who have no retirement coverage, according to a recent U.S. Small Business Administration study.
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That means a lot of small-business owners — be they freelancers, sole proprietors or consultants — are likely clueless about just what they can or should be doing to prepare for retirement. After all, they're running the whole show, so perhaps they can be forgiven for not focusing on retirement while juggling all those other balls in the air.
If a business has multiple owners, in fact, they also can participate in a solo 401(k) —although as soon as employees become involved, the business has to migrate to an employee-based plan.
However, solo 401(k)s offer a number of advantages they should know about, particularly since they can save money on taxes and prepare for retirement at the same time.
The top reason small-business owners seek out solo plans, according to Stuart Robertson, president of ShareBuilder 401(k), is the ability to set aside more than $50,000 tax deferred — lowering this year's taxes and possibly even dropping into a lower tax bracket altogether.
In a YouTube video, Robertson pointed out a couple of other features business owners should know about, the first of which is "access to your money, penalty-free, through a 401(k) loan."
Robertson said that "it can be a great way to get access to your money in times of need." In fact, he added, rolling over an "old Roth 401(k) or IRA" can provide the business owner with access to a substantial amount of money.
The second interesting feature is the Roth 401(k) which allows the business owner to put money away after tax and, at retirement, take it out tax-free — including earnings. The Roth 401(k) doesn't have the income limitations that a Roth IRA has, so "no matter what you're making, you can choose to put money into that option," he said.
One more bit of information that small-business owners might be clueless about is the fact that the deadline to set up a solo 401(k) for this year is fast-approaching. It's Dec. 31, although business owners will be able to contribute as late as April 15, 2015 for this year once the plan is set up.
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