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Retirement Planning & Self-Employed 401k's and Profit Sharing Plans

Congress created the best of both worlds for retirment savings. They combined the 25% profit sharing plan with a generous 401k that allows an employee (or self-employed person) to tax defer up to $17,000 for 2012. That amount increases by $5,500 if you are over the age of 55. The maximum combined contribution for 2012 is $49,000.

Remember when it was $55,000?

If your corporate year ends in March of 2012 AND your company only employees you, or you and your spouse, you have time to open or expand an existing plan. Without the 401k component, you are limited to 25% of compensation. Without the profit sharing component, you are limited to a maximum of $17,o00 or compensation, plus the catch if you are over 55 years old, whichever is less.

Why not have both? They are voluntary not mandatory. If you have the 401k/profit sharing combination, you expand your options without placing yourself in a position where you have to make a contribution.

If you are incorporated, make sure your plan provides for participant loans. The law allows you to borrow up to 50% of your vested amount up to $50,000. Basically, you pay yourself interest on your loan balance.