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A simple solution for the one-person (self-employed) business owner!  

ITIPress.org - Soraya Nasrallah

Ok, so you have your own business, company name, business bank account and you are rolling along selling your product and /or services! Everything is looking pretty good and you are starting to make some money. You have decided that you donít want to re-invest all of your profits back into your company because you know that the only way to move ahead financially, on a personal level, is to invest some of those profits so that they may grow to a respectable sum of money that will help you retire in style! You are not sure what to do about it, but you do know that you would like to save money on taxes. Currently you only have basic fixed and variable expenses; for example, home, car, electric, phone and some credit card bills. Your main goal is to save for the future and invest part of your profits to the company while working on what you love to do! After all, it is the only way to be happy and successful at the same time!

Letís review the facts to this particular situation:

  • You have a business and it is bringing you some decent profits
  • You donít want to invest all of your profits back into the company
  • You want to defer taxes and save for the future
  • Your bills are basic and you are not thinking of adding any other expenses that will effect your monthly expenditures
  • You want to have a great time working and would like to retire in style

Here is a plan for this type of situation. Keep in mind that even though every scenario may require a different plan, the basic plan that I am mentioning here will go well for a wide variety of circumstances. Note that this type of solution applies to a one-person business and that certain conditions apply (these conditions will be briefly mentioned).

A simple solution for the investment needs of the one-person (self-employed) individual.  

  1. The key is to open a Self-Employed 401(k), which must be established by December 31st. Contact you investment adviser
  2. You must be a self-employed individual or business owner that does NOT have employees OTHER than your spouse
  3. Contributions are as follow: employer contributions are due by employerís tax filing deadline plus extensions and salary deferrals for owner-only plans are generally due by employerís tax filing deadline plus extensions 
  4. Employer contribution is up to 25% of compensation up to a maximum of $42,000.00 in the year 2005. This allows you to defer taxes on a LARGE sum of money. At the same time, it offers you the opportunity to invest or keep aside a substantial amount of cash
  5. My recommendation is to invest this money (for example) the following way:

Investing $42,000.00 (before tax) scenario for 2005 inside your NEW Self-Employed 401(k)!

    • $30,000 into the no-load Fidelity Four-In-One Index Fund. Symbol for this fund is (FFNOX). The management fee is 0.36%, no 12-b1 fees and if you try to sell this fund within 90 days you will be assessed a short-term trading fee of Ĺ of 1 percent (.50%). The minimum for this fund in a retirement account is $2500 and for a non-retirement account it is $10,000.  
    • This fund invests your monies the following way:

1.      55% into the S&P 500

2.      15% into US small & mid cap stocks

3.      15% international index fund (remember that we are moving more toward a global economy)

4.      15% in US bonds which offers your money a cushion during market turbulences

    • The remaining $12,000 should be left alone within the 401(k) gaining interest. This allows you to have additional monies that can be available for any other investment opportunity that may show up. Remember; donít put all your eggs in one basket.
    • By investing this lump sum amount into your Self-Employed 401(k), you will be able to defer that amount from your taxes, thus ending up with a smaller or no tax liability

Send your questions to Soraya@TheInvestor.tv
"Most people are about as happy as they make up their minds to be." - Abraham Lincoln




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