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Launch a solo 401(k) plan this year: dual tax winner

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in Small Business Tax

Most limits for retirement plans haven’t budged an inch in 2011. They’re exactly the same as they were last year. But some small business owners can take matters into their own hands.

Strategy: Set up a “solo 401(k) plan.” If you qualify, you can effectively benefit from both “employee” and “employer” contributions to your account.

Usually, this dual tax winner can’t be beat because it often allows you to sock away more money than virtually any other type of retirement plan.

Here’s the whole story: With the usual defined contribution plan used by small business owners—such as a Simplified Employee Pension (SEP) or garden-variety profit sharing plan—the employer’s deductible contribution for 2011 is capped at the lesser of 25% of compensation or $49,000 ($54,500 if you’re age 50 or older). The maximum compensation that may be taken into account for these purposes is $245,000 for 2011. But that’s as far as it goes.

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