setting up IRA or 401k for only 1 employee

[P.S.]

Has anyone set up a retirement account for only 1 employee? How did you go about doing it?

 

[wallygator69]

Hi,

Simple IRA is one of the least expensive for you. This year I think the employee can put in $10,500 of their salary tax deferred and then you can match 3% of their gross at the end of the year. In my opinion if they want to save for retirment they have to save something to get something.

If you want to be very generous a SEP IRA will let you and them put in a lot more money but whatever you do for yourself you need to do it for them. I think I put in 15% of gross and they put in nothing up to $27,500 per year a few years ago.

401K is no practical as it is very expensive for.

Lots of info on the web if you google SEP and IMPLE IRA's

Good Luck

 

[P.S.]

Thanks Wallygator!
Sep IRA sounds like the way to go, since it would be nice to match spouse's (employee's) 401k. We're trying to quickly set it up in time for 2005 contributions and as a way to encourage her to save.

 

[Martha]

Here is a thread where we talked about how to set up a solo/individual 401k: http://early-retirement.org/forums/index.php?topic=5778.0

The solo 401k has the potential to have the largest contributions set aside.

SEP IRA limits:
A SEP IRA owner may contribute up to 25% of compensation, as much as $42,000 for 2005 ($44,000 for 2006). However, the maximum compensation upon which SEP contributions can be based is $210,000 (220,000 for 2006). The term "compensation" for self-employed individuals refers to earned income.

Solo401k limits:
You can contribute up to $14,000 for 2005 and $15,000 for 2006 through salary deferral, although this may not exceed 100% of pay. The employer profit sharing contribution limit is up to 25% of pay. There is a total contribution limit, from both sources, of $42,000 in 2005, but only income up to $210,000 can be considered for 2005 and 220,000 for 2006.

However, under a “catch up” provision, individuals age 50+ may contribute an additional $4,000 in salary deferrals beyond the $14,000 in 2005 and $5000 in excess of $15,000 in 2006, allowing for a total contribution limit of $46,000 in 2005 and $49,000 for 2006.

(If I recall correctly, the 25% figure for the 410k and SEP plans may be actually 20% if a solo proprietorship, but the total maximum dollar amounts are the same.)

An example for 2006:

100,000 income age 45, solo401k option
15,000 in personal contributions
25,000 in "employer" contributions (25% of 100,000)
Total in 401k is 35,000.

100,000 income age 45, maximum SEP IRA option
25% income, or 25,000 total in SEP

If you use the 20% of income figure, this example still favors the solo 401k.

Also, there is no catch up provisions if you are over 50 for the SEP.

This is over simplified, read IRS publication 560 from the www.irs.gov website for more info.

 

[Martha]

Thanks Wallygator!
Sep IRA sounds like the way to go, since it would be nice to match spouse's (employee's) 401k. We're trying to quickly set it up in time for 2005 contributions and as a way to encourage her to save.

If you want to do this for 2005, you will need to do an IRA such as a SEP because you can do so up to April 15. A 401k would have to be set up in 2005 for 2005 contributions.

 

[P.S.]

Martha: Thanks for the good info, esp for IRS pub#.

 

[eridanus]

(If I recall correctly, the 25% figure for the 410k and SEP plans may be actually 20% if a solo proprietorship, but the total maximum dollar amounts are the same.)

This is correct. It's 20% for sole-proprietors. It gets tricky with the SE tax so use the worksheet.