The Advantage Of Being In 401K
Self employed individuals have to take care of many things that those who work for others have done for them. Some of those things include paying taxes, securing health insurance and planning for retirement. Most employees have some sort of 401K plan available to them to use as a retirement instrument. Though self employed people have more possibilities open to them in terms of retirement planning, they will often find that a 401K is the also the best choice for them.
In 2001, congress passed the Economic Growth and Tax Relief Reconciliation Act, which frequently states that the wise choice for self employed people is a 401K retirement account. They cite the 401K's simplicity and low administrative costs as reasons making it the best choice.
401K for individuals are very similar to traditional plans for groups and are actually less regulated. Since the individuals and their families are the only ones participating in the plan, decisions carry no impact on other people and therefore enjoy less government interference. Occasionally business partners can contribute to the same 401K, but this too sequesters the risk to only a few people.
The biggest reason for individuals to invest in 401K plans as opposed to other retirement plans is the ability to invest larger amounts of capital into the plan. Retirement accounts have a limited maximum contribution per individual each year that can be tax deferred. Individual 401Ks have a much larger maximum contribution. The maximum amount is set each tax year and is currently set at about $49, 000 annually for individuals under 50 and $54, 000 for those over 50. For business, the maximum amount is set by net earnings
The definition of self employed, as it refers to 401Ks, includes business owners, freelancers, contractors, or partners in a Limited Liability Company (LLC). If you fall under one of these groups then you can contribute into two types of 401K accounts. The first type, known as a Roth account, uses taxed earnings to fund the plan. The other type allows you to use pre-tax money and defer paying taxes until the funds are withdrawn, usually at a much lower rate. Some people prefer to take the Roth route so they will only have to pay taxes on earnings and interest when the funds are withdrawn, which is better for people who plan to continue working past retirement age.
Though 401Ks are not always the best alternative for self employed individuals, it will often be a good instrument to at least add diversity to one's retirement portfolio. Unlike a traditional employer 401K, the individual will have to decide into what the account invests and a financial planner should be consulted. Regardless of one's employment situation, retirement can't be ignored and the self employed must be even more conscious of their retirement plan than those who can count on a corporate or government pension upon retirement.
This article was brought to you by Caroline Peroz of Ratelines.com. Since 2004, Ratelines has provided factual advice on cd rates.
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