Eligibility for Retirement Savings Contribution Credit (in 2008):
Single person with income less than $26,500 a year
Head of household with income less than $39,750
Joint return with income less than $53,000

These amounts change every year. Check out the IRS web site for the latest figures by searching IRS.gov for “Retirement Savings Contribution Credit.”

The credit is not available to full time students and people claimed as a dependent on someone else’s (like a parent’s) tax return.

The tax credit runs on a sliding scale, starting at 50 percent for single filers with income under $15,500 and joint filers with incomes less than $31,000. The 50 percent tax credit means that for every dollar that you contribute to your 401k, your tax bill is reduced by 50 cents. As incomes rise, the tax credit falls, until it reaches ten percent for those just under the threshold of eligibility.

Think about what this means for the lowest income workers whose companies will match half of their contributions: putting money into the 401k is free! Half the contribution is matched by the company, and the other half offsets federal taxes. It’s a great deal if you can tighten your belt a little to be able to make the contribution.

Keep in mind, however, that this is not a “refundable credit.” If you have enough deductions that you owe no tax whatsoever, you will not get cash back from the government. You’ll only benefit if you have a tax liability. (I’m NOT talking about whether you get a refund after you file your taxes; I’m talking about whether your tax return shows that you pay any tax at all.)

The Retirement Savings Contribution Credit is a very good help to lower income workers concerned about their retirement. Unfortunately, it does not apply to very many people. Those folks who are eligible often feel that they have very little discretionary income. Saving for retirement is hard for low-income workers, but it is possible. This tax credit will make the task a little easier.

source: ezinearticles.com

What is the difference?

Here is a general breakdown of the two: SEP IRA’s allow for tax-deductible contributions as well as deferred growth. The contribution limits for the SEP IRA is 25% of your compensation with a cap of $44k. The only issue with this is that the IRS only allows you to contribute 25% of you net profit. This is where one of the major advantages come into play for a solo(k).

A Solo(k) has the same contribution limits however you can not only contribute 25% of profit sharing you can also contribute tax-deductible salary deferrals of up to $15k per year. Basically you can make very little self employed income and defer it all. This gives you an added advantage if your self employed income is your secondary income and you are looking to maximize your tax advantages. Best of all there is no UBIT on leveraged real estate or investments, and you have the ability to borrow against the plan.

You can also add your spouse to the plan and your total annual contributions can total $109k for joint filers over the age of 50!! Another key advantage is that you can separate your Solo(k) into four Sub-Accounts or ”buckets”:

1) Two Salary Deferral Buckets: Allocate up to $16.5k or $22k (if over age 50) to either:
• Roth Sub-Account (No restriction on AGI)
• Traditional Tax Deferred Sub-Acount

2) Profit Sharing Bucket: Lessor of:
• A) $49k (minus $16.5k from salary-deferral)
• B) 25% of your ”compensation” or ”earned income”

3) Rollover Bucket: All Rollovers go here, both funds are not permitted

4) A TPA is required. Pre-established relationship with Pension Benefits Consultants (PBC) In summary you can win big being self-employed and having a Solo(k).

source: ezinearticles.com

As of 2009 you can invest up to $16,500 if you are under the age of 50. If you are between 50 and 59 years and 6 months of age then you have an additional $5,000 catch-up investment you can make to prepare for your retirement.

If you are looking at this amount and thinking you’d like to add more to it than that, or you would like to diversify the money you are currently saving, you may want to look into a Roth IRA option.

With a traditional employer sponsored 401K plan money is taken from your checks before taxes are taken out and the money is deposited into your retirement plan. When you reach 59 and 1/2 years old and are able to start making withdrawals from the account you will then pay taxes on this money. If you have to pay the taxes eventually, why would you want to invest before taxes? The tax money that you smartly invested will grow and help you earn returns, giving you a healthier nest egg.

While the 401k maximum contribution is much higher than the Roth IRA option, and as I’ve mentioned above the 401K has many advantages, you may want to look at the IRAs as well.

A Roth IRA works a little differently, however. The first big difference is that an IRA, or independent retirement account, is set up by you, independently. You have more control of the account and pick your investments completely on your own, or with the guidance of the company you select to handle the account. A Roth account has the added difference that the money you invest is after taxes, which means that in retirement you won’t have to pay taxes on your withdrawals.

With a mix of the two investments you’ll be able to diversify your tax obligations and experience the best of both investment options.

As mentioned above the 401K maximum contribution is at $16,500 with a catch up limit of $5,000 for those over 50 years of age. Independent retirement accounts, as of 2009, have a limit of $5,000 with a $1,000 catch up.

source: ezinearticles.com