Yesterday, I had the pleasure of attending for the first time Realty411’s Masters of Real Estate Conference & Expo in San Jose, CA. There wasn’t much discussion about commercial real estate or apartment investing, but there is always something to learn, and learn I did.
Did You Know?
One of the speakers gave a talk on self-directed retirement plans. I will blog a lot more on that topic, but if you don’t know what a self-directed IRA or 401(k) is, put it in a search engine — you won’t be disappointed. In any event, one thing the speaker introduced me to is the Individual 401(k). The Individual 401(k) is a program that is nothing short of stupendous, fantastic and life changing! Honestly, what is the difference you ask?
Well, here’s the difference. If you are a W-2 employee, you are very likely used to the employer-sponsored 401(k), or even IRA. In the W-2 401(k) program in 2014, your contribution limit as an employee is a not so high at $17,500, or $23,000 if you are playing catch-up — see the official language of the IRS right here: http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics—401(k)-and-Profit-Sharing-Plan-Contribution-Limits.
The amazing part of the Individual 401(k), or the “indi (k)” as the speaker called it, is that even as a sole proprietor (not that I recommend this business structure) you will have the ability to contribute some serious dough to your retirement plan. One of the best parts of this plan is that you need have only the intent to make money. Huh? That’s right, you as the owner of a business with the intent to make money, you may offer yourself a super way to contribute way more than your W-2 401(k) could ever hope to offer.
Being self-employed and offering an Individual 401(k) to yourself (and to your spouse or partners), you are entitled to not only contribute the “employee” contribution limit of $17,500, but also the “employer” contribution amount which is $52,000 (in 2014) or 25% of your compensation, whichever is less! Incredible. And this is only if you are younger than 50. If you are 50 years and older, the limits are even higher! Here is the link to the IRS page that talks specifically about this program and how it should be implemented: http://www.irs.gov/Retirement-Plans/One-Participant-401(k)-Plans.
So, by my simple calculations, here how this could work for you (age 38):
You start a business that compensates you $208,000 for all of your hard work.
You decide to contribute the maximum amount allowed by the program at $17,500 in 2014.
Your employer (you) decides that they will contribute 25% of your salary, or $208,000 X 25%, or $52,000.
That means your total retirement contribution amount equals $52,000 plus $17,500, or $69,500! Voilà!
If you use the Individual 401(k) for yourself, please share your story. Before hearing this yesterday, I hadn’t even considered this retirement strategy, and now I’m banking on it.
CREtirement 