One-Person and Small Businesses – A New Way to Save More for Retirement
The tax law passed in 2001 offers new opportunities for retirement saving for everyone from employees of big corporations to one-person businesses. If you own a business that employs only the owner(s), spouse or certain family members, and has no common law employees, there’s a new retirement savings vehicle that can help you put away even more for retirement while saving on taxes now.
Equitable’s Owners 401(k) Plan, funded by Momentum SolutionsSM, a group variable annuity contract, combines the benefits of a traditional profit-sharing retirement plan with the opportunity to significantly increase the amount you can save for retirement. Because of the changes in the 2001 tax law, 401(k) contributions are no longer included in your 25% profit-sharing deduction limit. This means that you may be able to contribute 25% of your salary to a profit-sharing plan and up to another $11,000 in 2002, in an Owners 401(k) Plan, to a maximum of $40,000. If you are over the age of 50, the 2002 maximum contributions are $12,000 in your 401(k) and $41,000 overall.
Save More on Taxes Now, Save More for Retirement Later
Whether you’re hoping to retire early or simply to live comfortably during your retirement years, the more you save now, the faster your retirement savings can grow. As a small business owner, you can save more for retirement than most corporate employees, and, if your business qualifies for an Owners 401(k) Plan, you can maximize these savings.
Here are examples of how Equitable’s Owners 401(k) Plan can help you save more:
Example 1: Reach maximum contribution limits sooner
Molly Clark is close to retirement (age 55) and wishes to contribute the maximum allowed to her retirement plan. (She owns a company that is unincorporated.) Here is what she would be able to contribute in 2002 on earned income of $145,000, with and without an Owners 401(k) Plan.
Without Owners 401(k)
| Maximum profit-sharing contribution (25% less contribution amount) | |
|---|---|
| ($145,000 - $29,000 = $116,000 x 25%) = | $29,000 |
| Total saved for retirement without Owners 401(k) = | $29,000 |
With Owners 401(k)
| Maximum profit-sharing contribution | $29,000 |
|---|---|
| + Maximum 401(k) contribution = | $11,000 |
| + Catch-up contribution (over age 50) | $1,000 |
| Total saved for retirement = | $41,000 |
Not only does the Owners 401(k) enable Molly to take a larger contribution, it also further reduces her taxable income, allowing her to save money now.
Example 2: Save even more if your spouse works for your business
Frank Rogers, age 52, owns a business and draws a salary that permits him to put away the maximum $41,000 in 2002. His wife, who works for the business part-time, earns $16,000. With an Owners 401(k), Mrs. Rogers (age 49) could save an additional $15,000 toward her retirement, as shown here:
| Maximum profit-sharing plan | $4,000 |
|---|---|
| 100% of compensation salary deferral | $11,000 |
| Spouse total | $15,000 |
Together, Mr. and Mrs. Rogers would have joint retirement contributions of $56,000 for the year.
An Owners 401(k) Plan is ideal for those who have part-time income from a side business because it allows you to contribute far more to your retirement than other available plans. It also benefits owners of S-corporations who may take a substantial portion of their income as undistributed earnings.
More benefits of the Owners 401(k) to qualifying businesses:
- Your full contribution is tax-deductible, thus reducing your taxable income.
- Any investment income you earn is tax-deferred.
- You may borrow up to half of the assets in your Owners 401(k), up to $50,000.
- Minimal paperwork and lower costs than regular 401(k) plans.
- You can roll over assets from SEPs, SARSEPs, and Keoghs as well as individual IRAs.
- If your business expands and you hire employees, you can easily transition to a regular 401(k) plan.
The bottom line—the Owners 401(k) is a better retirement plan for one-person and small businesses. For a Momentum SolutionsSM disclosure document, which contains more complete information, such as applicable fees and charges, please call your financial professional. Please read the disclosure document carefully before you invest.
AXA Advisors does not provide legal or tax advice. Please consult your tax or legal advisor regarding your individual situation.
Jason Richmond, MBA
Registered representative of AXA Advisors, LLC (member NASD, SIPC)
100 Europa Dr., Suite 599
Chapel Hill, NC 27517 (919) 960-2637
Insurance agent of AXA Network, LLC, an insurance brokerage affiliate, offering life insurance and annuities of The Equitable Life Assurance Society of the United States (New York, NY), an affiliated insurance company, and the insurance products of over 100 unaffiliated companies.