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The 401(k) is undergoing its biggest change in 25 years. This
year not only can you can put more money than ever before in your
401(k) but you can also add a Roth option. The Roth option
allows you to keep part of your nest egg completely tax-free,
according to retirement plan expert, Daniel Lamaute, at Lamaute
Capital (www.InvestSafe.com).
Roth 401(k) Contributions
Beginning in 2006, your 401(k) plan may be amended to allow you
to put all or a portion of your salary deferral into a special
Roth section. Contributions to the Roth section are with after-
tax income, so these contributions will not reduce your taxes
immediately. However, unlike with other retirement funds, Roth
distributions are tax-free for all your contributions and
earnings from the Roth account - provided certain requirements
are met. If you are self-employed you can open your own Solo
Roth 401(k) plan.
Maximum Salary Deferral Contribution - This year the maximum that
can be contributed from salary deferrals to a 401(k) is $15,000
plus up to $5,000 "catch-up" contribution for those age 50 or
more, for a total of $20,000. Salary deferral contributions to a
traditional 401(K) are pre-tax and thus reduce the amount of your
salary subject to taxes.
Maximum Profit Sharing Contribution - The maximum that can be
contributed from the business to your 401k account is 25% of your
income or $44,000, whichever is less. The profit sharing
contribution is not taxed as income to you until distribution.
Maximum 401(k) Contribution - The maximum (salary deferral +
profit sharing) that can be contributed to a 401k in 2006 is
$44,000. Counting the added contribution of up to $5,000 in
"salary deferral catch-up" that is allowed for those 50 years or
older, brings the total possible contribution to $49,000.
Contributions to retirement plans cannot exceed 100% of earned
income and they can be made as soon as the income has been
earned.
Many experts believe that the added complexity of the 401(K) with
its Roth option and larger contribution limits will drive more
and more plan participants to seek professional advice when it
comes to their retirement savings.
Writer's Resource Box:
Daniel Lamaute
Lamaute Capital, http://www.InvestSafe.com specializes in
retirement plans for small business and entrepreneurs.
The firm was one of the first to market the Solo 401(k)
plan with a loan feature for self-employed individuals.
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