The WSJ today had a great article about an increasingly popular employee benefit - tax free commuter benefits. These benefits typically enable employees to reduce their taxable income and cut their commuting costs by an average of 30%. The federal tax code allows employers to provide both subsidized and non-subsidized tax-free transit, vanpool and parking benefits to employees. If you commute to work and your company offers this benefit, by all means - take advantage!
How It Works*
1. Pre-Tax Salary Deduction: Money deducted from a paycheck before taxes are taken out saves employees up to $500 each year on their commute! Here’s how it works. For the tax-free maximum of $115 a month for transit ($1,380 a year) or $220 for parking ($2,640 a year), gross salary will be reduced up to $330 a month, but take-home pay falls by only $200. This equals $130 in taxes saved each month—more than $1,500 annually to use for something else! Normally, the pre-tax salary deduction option also saves employers 8% of the amount used for commuting – often much more.
2. Company Benefit: If an employer chooses to pay for Commuter Check, it’s like free parking or a tax-free raise for the employee. Plus, the employer has no payroll tax on this added benefit. For example, giving salary with the same after-tax value as $1,380 in Commuter Checks would cost over $ 2,640—the difference is what’s saved in taxes!
3. Combination Plan: Any combination of the employee-paid and employer-paid options can be offered, as long as the total does not exceed $1,380 a year for transit or $2,640 a year for parking.
*From Accor Commuter Benefits Website
Please contact Dollars & Sense Education to bring our seminars to your company or organization!
Dollars & Sense Education - Raising Your Financial IQ!
www.daseducation.com
nicole@daseducation.com
215-499-3834
Here are some great links from last week!
JLP at All Financial Matters talks about:
Index Mutual Funds or Exchange-Traded Funds? How About Both!
and
A Question From a Reader: How to Calculate Taxes
http://allfinancialmatters.com/2007/10/31/a-question-from-a-reader-how-to-calculate-taxes/
At Money, Matter and More Musings folks were chirping about:
Things You Should Know About Percentage Traps
http://www.thetaoofmakingmoney.com/2007/10/31/536.html
J.D. over at Get Rich Slowly discussed:
A Brief Overview of Estate Planning Software
http://www.getrichslowly.org/blog/2007/10/31/a-brief-overview-of-estate-planning-software/
Jeremy at Gen X Finance breaks down:
When Owning a Home Isn’t Always All It’s Cracked Up to Be
http://genxfinance.com/2007/10/30/when-owning-a-home-isnt-always-all-its-cracked-up-to-be/
Meg at All Financial Matters explains:Millionaires Focus on Freedom
http://allfinancialmatters.com/2007/10/29/millionaires-focus-on-freedom-2/
Please contact Dollars & Sense Education to bring our seminars to your company or organization!
Dollars & Sense Education - Raising Your Financial IQ!
www.daseducation.com
nicole@daseducation.com
215-499-3834
Ok folks, another entry for the self starters out there! Part 4 of how to sock your money away for retirement for the self employed. Non self employed folks, come back next week and I’ll some good stuff for you! So let’s do this… Part 4 - The Keogh.
Keogh plans are the self-employed equivalent of corporate retirement programs. They come in two basic flavors: profit-sharing plans and defined benefit pension plans.
Annual contributions to Keogh profit-sharing plans are based on a percentage of self-employment income or compensation and subject to a $45,000 ceiling. A plan document must be drafted in Year One (this may cost a couple hundred bucks), and the IRS demands an annual report (you can probably do this yourself).
Keogh defined benefit pension plans are designed to deliver a targeted annual retirement benefit, which can be as high as $180,000. Each year’s contribution must be calculated by an actuary — the exact amount depends on your income, the target benefit, years until retirement and anticipated investment returns. Annual actuarial fees and the required IRS report can run up to a couple grand. Another negative: You’re locked into making the actuarially determined contribution each year. However, if you make good bucks and are over 50, a defined benefit plan may be worth all the trouble — because it permits much bigger contributions than any other type of program. If you’re younger, go with a SEP, profit-sharing Keogh or Solo 401(k).
To put this entry in perspective, the Keogh plan is quite complicated and probably not appropriate for most self employed folks out there. Keogh setup and ongoing fees for paperwork and for professional guidance are more suited to self-employed individuals with established businesses and consistent incomes. One reason behind this limited parameter is that once you open a determined benefit contribution plan, you’re locked into that contribution every year.
Do I Qualify For A Keogh?
Any sole proprietors, partnerships, LLCs, and anyone with self-employment income.
Are Keogh Contributions Pre or Post Tax?
Keogh plan contributions are deducted from pre tax income and contributions and interest income are tax deferred until withdrawal.
Where Do I Set Up a Keogh?
A Keogh plan is something you REALLY want to talk to a live financial advisor about.
How Much Can I Contribute Annually to a Keogh for myself?
You will encounter the same $45,000 ceiling for contributions to a Keogh profit-sharing plan but you can set a ceiling as high as $180,000 for a defined benefit Keogh plan.
Why Not Just Open a Traditional or Roth IRA?
Do Both!
When Do I Set This Up?
If you are establishing a plan for the first time, complete the Adoption Agreement(s) by December 31 (Simplified Keogh plan) or your fiscal year-end (Standard PSP/MPP plan), and you will be eligible for a deductible contribution for this year.
What If I Already Participate In My (Other) Employers Plan?
I was not able to get a definitive answer about this.
Do I Have to Put Away the Same Amount of Money Every Year?
With a profit-sharing plan you can vary annual contributions from 0 - 25% of compensation per year or skip a year if business conditions change.
With a defined benefit pension plan you make fixed contributions each year (1 - 25% of compensation) as your commitment to retirement benefits but once you select a percentage, you must contribute that same percentage each year, no more and no less. This contribution cannot be changed unless you amend the plan.
What If I Have Employees?
I was not able to get a definitive answer on this one!
Next Stop!
In Part 5 I will sort out what plans make sense for your individual situation!
For the rest of this series:
Please contact Dollars & Sense Education to bring our seminars to your company or organization!
Dollars & Sense Education - Raising Your Financial IQ!
www.daseducation.com
nicole@daseducation.com
215-499-3834
So for all you self employed folks out there, this week is for you! I am laying out all of your retirement plan options in gory detail. For everyone else, take the week off from reading. Grab a beer. Watch Heroes:) The first installment of this series discussed the SEP IRA. Part 2 of this series explores another popular option: the Solo 401K. The next two entries will describe the other options available to the self employed and the last entry will discuss what options are appropriate for you according to the kind of business you have and your goals!
Do I Qualify For A SOLO 401K?
Any type of business with no employees, can establish an individual 401(k) plan – generally referred to as a Self-Employed 401(k), or Solo 401(k). The business can be brand new or old. It can be a sole proprietorship, LLC, partnership, or corporation.
Where Do I Set Up a SOLO 401K?
Fidelity and T. Rowe Price offer SOLO 401Ks or 401kBrokers.com.
How Much Can I Contribute Annually to a SOLO 401K for myself?
For the tax year 2007 you can contribute up to $15,500 plus 20% of your business income, with a maximum contribution of $45,000 in 2007. You can make an extra $5,000 catch-up contribution if you’re 50 or older.
Why Not Just Open a Traditional or Roth IRA?
Do Both!
When Do I Set This Up?
Each Self-Employed 401(k) must be set up no later than December 31, to be eligible for tax deductions for that tax year.
What If I Already Participate In My (Other) Employers Plan?
If you have a regular 401(k) through an employer and have some freelance earnings on the side, then your solo 401(k) limits will be reduced by any contributions you’ve made to a regular 401(k). But that only affects the first $15,500 of contributions, not the 20% of business income. So if you contributed $10,000 to a regular 401(k) through your employer, for example, then your solo 401(k) contributions will be limited to $5,500 plus 20% of your business income.
Do I Have to Put Away the Same Amount of Money Every Year?
No!
What If I Have Employees?
If you have employees you are not eligible for a SOLO 401K unless it is your spouse.
Anything Else?
Keep in mind that the eligibility requirements for having a self-employed 401k plan are quite strict. It’s not widely offered by most investment companies and those that do offer it provide limited investment options. And once you add a single employee outside of your spouse, you must convert to a traditional or SIMPLE 401k plan.
Summary
If work for yourself take full advantage of the tax benefits that affords you! A Solo 401K allows you to defer a significant portion of your retirement savings from taxes. Don’t let Uncle Sam get more than his fair share!
In the next installment of this series (Part 3 of 5) I will describe another kind of retirement account for the self-employed - The SIMPLE IRA!
Other great blog entries on Solo 401Ks:
http://www.mymoneyblog.com/archives/2007/10/fidelity-self-employed-401k-account-review.html
http://www.my-personal-finance-blog.com/2006/12/28/set-up-my-solo-401k/
http://taxplaya.typepad.com/tax_playa/2007/03/selfemployed_40.html
For the last article:
10 year Treasury
Blogging
Budget Travel
christmas tipping
commuter benefits
Expedia
Golden Rule of Personal Finance
Health Savings Accounts
International Travel
Joelle Reeder
Kathy Scoleri
loans
Mortgage Backed Securities
Online Travel
Orbitz
Philadelphia Inquirer
SNL
tipping for the holidays
Travelocity
Women Bloggers
women owned business 
