We are pleased to announce that Mr. Jonathan W. Resuello is joining our firm as a business associate and that Mr. Adam Schwarz has returned for a second summer internship with our firm.
One-person 401(k) Plans for the Small Business Owner
One-person 401(k) plans are becoming increasingly popular for businesses that employ only the owner. Given the right circumstances, such plans can allow a large amount to be contributed on behalf of the owner while maintaining flexibility in making contributions in future years. The cost of preparing the annual return (Form 5500 is required) is nominal in comparison to the additional funding a one-person 401(k) plan allows. Also, because the plan has n o employees other than the owner, it is not subject to the complicated nondiscrimination tests normally applicable to 401(k) plans. For 2007, a business owner can make an elective deferral contribution of up to $15,500 ($20,500 if he or she is age 50 or older) plus an employer contribution of up to 20% of self-employment (SE) income or 25% of compensation. In calculating the allowable employer contribution, the owner’s SE income or compensation is not reduced by the owner’s elective deferral contribution. The total contributions (elective deferral plus the employer contribution) cannot exceed the lesser of 100% of the participant’s compensation or $45,000 ($50,000 if age 50 or older) for 2007. Example: Maximizing contributions with a one-person 401(k) plan. Randy, age 50 (by the end of the current year), is the sole owner and employee of Flight-in-Training, a sole proprietorship. Flight-in-Training is also the sole source of Randy’s earned income. Randy earns $145,000 (net of the SE tax deduction) in the current year and wishes to maximize contributions to a retirement account. Randy believes that the business will probably continue to be profitable, but he would like the flexibility of determining on a year-to-year basis how much to contribute. Randy does not expect to hire employees and will remain a one-person company.For 2007, the maximum contribution Randy can make to his one-person 401(k) plan is $49,500. This maximum contribution consists of his elective deferral in the amount of $15,500, his catch-up contribution of $5,000 (he is age 50 or over at year-end), and his profit sharing contribution of $29,000 (20% × his SE income of $145,000). The business owner can borrow from his or her 401(k) plan, assuming the plan document so permits. The maximum loan amount is 50% of the account balance or $50,000, whichever is less. When the business employs someone other than just the owner, 401(k) contributions may be required for the other employees, in which case the plan would become a “standard” 401(k) plan with all the resulting complications. However, the plan can exclude from coverage any employee who is under age 21 and any employee who has not worked for at least 1,000 hours during any 12-month period. Because this exclusion rule allows the business owner to avoid covering young and part-time employees, the plan may still qualify as a simple and easy one-person 401(k) arrangement.
Additional retirement plan choices for the business owner include Keogh plans, SEP plans, SIMPLE IRAs, and the traditional and Roth IRA. Please call us to discuss which plan will maximize contributions and save the largest amount of tax dollars.
Review Your Will Periodically
A will is an integral part of most estate plans. It is the legal instrument through which an individual disposes of his or her property, determines who will manage the administration of his or her estate, and appoints a guardian for any minor children. We recommend that you review your will periodically, as tax legislation, family relationships, economic situations, personal conditions, planning objectives, and the state of principal residence may all change over time. The importance of the review of your will by all members of the estate planning team cannot be overstated. The ultimate purpose of the review is to ensure that the will and its specific terms meet your ever-changing goals and objectives. The estate tax is scheduled for repeal effective for decedents who die in 2010 and the tax will reappear in 2011. It will require an act of Congress (literally) to permanently repeal the estate tax. Prior to the scheduled repeal, the 2001 Tax Act provides for a gradual increase in the applicable exclusion amount for estate tax purposes from $1 million in 2002 to a maximum of $3.5 million in 2009. Many existing wills provide for a bypass trust to be funded with assets in an amount up to the applicable exclusion amount. Because this amount increases significantly in the next few years, it is important to fully understand the consequences that such a provision will have on your estate. In addition to your will, other documents should be considered when reviewing an estate plan. Documents that provide for lifetime contingencies or other events, such as incapacity, are an important element of your estate plan. Beneficiary designations for assets that will pass outside the terms of the will must also be reviewed (these are referred to as nonprobate assets). Examples of nonprobate assets are life insurance proceeds, retirement plan benefits, and revocable living trusts which all pass directly to the designated beneficiary. The probate process applies to decedents who die and leave a will (testate), as well as those who die without a will (intestate). When a will exists, the probate process involves establishing the will’s validity. If no will exists, the process centers on establishing who is entitled to receive the property under state law. Please call us if you have questions on estate taxation or any other personal or business tax planning issues.
Please Call Us
Before completing any significant transactions based on the above information, please contact us for advice on how the information applies in your specific situation. From ideas for your business to suggestions for family and other personal situations, we are available to work with you to develop strategies for reducing your taxes and improving your financial situation.
