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 ADIDAS ADIPURE 11PRO XTRX FG FOOTBALL BOOTS 100 AUTHENTIC  US $181.63
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 Umbro Speciali 2001 FG Soccer Shoes US 115 UK 105 US $59.99
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 PROSTAR NEON SPORT CUSHIONED SOLE TECHNICAL SOCKS 2 PRS UK 7 12 RRP £699 US $6.32
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| The Soccer Blog |
The Best Retirement Vehicle for Sole Proprietors
Choosing the Individual 401(K) - The Best Retirement Vehicle for Sole Proprietors
By Jason Whitby
Retirement
The SEP-IRA is dead. At least it should be for ever sole proprietor that is looking for the best retirement vehicle. There are very few slam dunks in this industry but choosing the Individual 401(K) over the SEP IRA is clearly one of them. If you are a Sole Proprietor and you want to maximize retirement contributions with the lowest cost and highest flexibility, then you deserve it to yourself to read these 5 reasons why the Individual 401(K) is the best retirement vehicle for sole proprietors.
Reason 1: Maximum Pre-Tax Contributions
The first reason why the Individual 401(K) is better is that the maximum pre-tax contributions are higher at every level of net earnings before qualified plan deductions for the Individual 401(K) than the SEP IRA. For example, at $50,000 of net earnings, the Individual 401(K) can contribute up to $31,293 while the SEP IRA is maxed out at only $9,293. That is a $22,000 difference in favor of the Individual 401(K). The Individual 401(K) maximum contributions far exceed the SEP IRA by about $22,000 until net earnings surpass $175,000. At that point, the difference decreases but is still in favor of the Individual 401(K) by $5,500 at the maximum allowable amounts. This $5,500 difference is because the Individual 401(K) has the catch-up provision for individuals over 50 while the SEP IRA doesn't.
The Individual 401k beats the SEP IRA for the maximum plan contribution no matter what the net earnings. For sole proprietors living in high income tax states and those with additional outside sources of income, this difference can be especially meaning as well as being the difference between a refund and a payment when it comes to tax time. You also should remember that this difference is going to happen each year so it literally can mean the difference between hundreds of thousands of dollars in your retirement plan over the course of your career.
Reason #2 Contributions are Discretionary & Loans
Individual 401(K) contributions are not mandatory every year. This allows sole proprietors to manage their cash flow and contribute the maximum amounts in good years while contributing less or nothing at all should the business take a turn for the worst. Additionally, owners can take loans up to up to $50,000 or 50 percent of the value of the benefits in the plan whichever is lower. While the SEP IRA doesn't have mandatory contributions, it has no such loan provisions. The ability to take a tax-free loan from your Individual 401(K) in cases of an emergency shouldn't be dismissed as trivial since sole proprietors often have extremely variable income from year to year.
Reason #3 Ease, Low Cost and Flexible
Both the Individual 401(K) and SEP IRA are easy to open and manage. If opened at a discount broker, it is possible to have practically no cost other than trading. Both are extremely flexible when it comes to investing. Additionally as of 2010, neither the Individual 401(k) nor the SEP IRA require you to file form 5500 with the Internal Revenue Service provided your plan contains less than $250,000 worth of assets.
Reason #4 Roth Conversion Strategy
Another fantastic advantage of the Individual 401(K) is that it is not considered when evaluating the pro-rata cost for a Roth Conversion but the SEP IRA is. Let's look at an example.
You have a SEP IRA with $100,000 and another Traditional IRA with $75,000 of which $30,000 is non-deductible contributions. If you convert your total Traditional IRA worth $75,000, you would only be able to exclude ($30,000 / $175,000) or roughly 17% of the conversion from ordinary income. Why? Because the IRS requires you to pro-rate the non-deductible contributions across your entire IRA balances including the SEP IRA.
Now let's say instead of having the SEP IRA you have an Individual 401(K) with $100,00 and you still have the Traditional IRA with $75,000 with $30,000 in non-deductible contributions. Now if you convert your total Traditional IRA worth $75,000, you would be able to exclude ($30,000 / $75,000) or 40% of the conversion from ordinary income since the Individual 401(K) is not included in the pro-rata calculation. In both situations you are converting $75,000 to a Roth IRA but with the Individual 401(K) you pay less in taxes today since you are only recognizing $45,000 = $75,000* (1-0.40) compared to the example with the SEP IRA in which you would have recognized $62,250 = $75,000*(1-0.17) in taxable income.
If you want, you could even take this a step further and move all of the pre-tax money from the Traditional IRA to the Individual 401(K). Then you would have $145,000 in the Individual 401(K) and $30,000 in your Traditional IRA of which 100% would be non-deductible contributions. In this case, it is possible to then convert the $30,000 Traditional IRA and exclude 100% of the conversion from ordinary income. Essentially a tax-free Roth Conversion.
Reason #5 Roth Individual 401(K)
If you are in a low tax bracket today and would prefer to pay the taxes but are still interested in maximizing your retirement savings, you can do a ROTH Individual 401k. The SEP IRA has no such option.
Conclusion
The Individual 401(K) is a better alternative to the SEP IRA for sole proprietors in every conceivable way. There is absolutely no debate about. At this point the only reason any self respecting sole proprietor would make a 2010 contribution to the inferior SEP IRA is that they just didn't know about the Individual 401(K) or they didn't realize the deadline to open an Individual 401(K) is December 31st as apposed to tax filing for the SEP IRA. So if you are a sole proprietor, do yourself a favor and open up an Individual 401(K) today.
About the Author
Jason Whitby, MBA, CFA, CFP®, AIF® is a Senior Financial Advisor at Investor Solutions, a fee-only investment management firm for high net worth clients and institutions.
i was wondering if my shoes are fake? because when i take of the sole, their is a numbers is it fake>?
My shoes are the skate or die pro editions?
The numbers are probably something like a model number.
