Higher Contribution Limits, Tax Savings Enable Self-Employed Individuals and
Small-Business Owners to Save More for Retirement
BALTIMORE, Dec. 6 /PRNewswire-FirstCall/ -- T. Rowe Price now offers an
Individual 401(k) Plan that potentially allows self-employed individuals and
small-business owners with no employees other than a spouse to save more for
retirement than they could with other types of retirement plans.
Unlike a SEP-IRA or profit sharing plan - two common retirement plan
options for small businesses - an Individual 401(k) allows the business owner
to add salary deferral contributions on top of the permitted employer
contribution, which is generally 25% of net business income. As a result, an
unincorporated business owner may be able to make higher contributions to an
Individual 401(k) Plan than to other types of retirement plans.
The maximum contribution to an Individual 401(k) Plan is $41,000 for 2004
and $42,000 for 2005. This includes both a participant's salary deferral and
employer contribution. Plan participants age 50 or older by the end of the
year may be entitled to contribute additional "catch-up" contributions. The
salary deferral limit in 2004 is $13,000 for those under age 50 and $16,000
for those 50 or older.
The deadline for establishing an Individual 401(k) Plan for 2004 is
December 31. An Individual 401(k) Plan kit is available at
http://www.troweprice.com/smallbusiness or by calling a T. Rowe Price
Retirement Specialist at 800-638-3804.
"With its higher contribution limits and the benefits of tax-deferred
growth, an Individual 401(k) Plan can help self-employed individuals and
small-business owners take a big step toward preparing for a financially
secure retirement, while also reducing current taxable income," said Douglas
Harrison, Vice President and head of the Tax-Deferred Products Development and
Management Group at T. Rowe Price. "When we looked at our existing small-
business plan customers, we found that approximately one-third could benefit
from the higher contribution limits associated with an Individual 401(k)
Plan."
Tax Savings and Benefits
Since employer contributions to an Individual 401(k) Plan are generally
deductible as a business expense, they can offer significant tax savings
potential. For example, an unincorporated small-business owner with net
business income of $150,000 in 2004 would pay approximately $37,150 in taxes
if no contributions are made to a retirement plan. If the individual maxed
out his or her contributions to the Individual 401(k) Plan by contributing
$41,000, taxes could be reduced to $26,900, a tax savings of $10,250.
Calculations are based on 2004 IRS Tax Tables and assume an unincorporated,
self-employed, married individual with two dependent children, filing jointly.
The spouse has no earned income. Actual savings will vary.
Because salary deferrals reduce taxable income, an Individual 401(k) Plan
may also provide an opportunity to invest more for retirement, assuming the
tax savings are invested in a taxable account on the side. Over a 20-year
period, for example, a $41,000 annual contribution to a taxable savings
account would provide an after-tax balance of $1.57 million, based on an 8%
annual rate of return and a Federal tax rate of 25%. If the same amount was
contributed to an Individual 401(k), and the resulting annual tax savings of
$10,250 from the above example was invested in the side account, the total
after-tax amount would be $1.8 million, or 15% more.
An Individual 401(k) Plan is only suitable for a business owner and his or
her spouse. Business owners who have, or plan to add other employees who may
be eligible to participate in a retirement plan, should consider a SEP-IRA,
SIMPLE IRA or profit sharing plan - three options that are also available from
T. Rowe Price.
T. Rowe Price charges no set-up fees for its Individual 401(k) Plan and
offers more than 65 no-load mutual funds for retirement investing. A $10
annual per mutual fund administration fee is waived for account balances
greater than $5,000 per mutual fund, $50,000 per shareholder, or $100,000 per
household.
For more information about any T. Rowe Price mutual fund, call
1-800-638-5660 to request a prospectus, which contains complete information,
including investment objectives, risks, fees, and expenses, that you should
read and consider carefully before investing.
Founded in 1937, Baltimore-based T. Rowe Price (Nasdaq: TROW) is a global
investment management firm with $212 billion in assets under management as of
September 30, 2004. The firm provides a broad array of mutual funds, sub-
advisory services, and separate account management for individual and
institutional investors, retirement plans, and financial intermediaries. The
company also offers a variety of sophisticated investment planning and
guidance tools. T. Rowe Price's disciplined, risk-aware investment approach
focuses on diversification, style consistency, and fundamental research.
T. Rowe Price Investment Services, Inc., distributor.
SOURCE T. Rowe Price
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Related links:
http://www.troweprice.com/smallbusiness
http://www.troweprice.com
CONTACT:
Brian Lewbart, +1-410-345-2242, or Steven
Norwitz, +1-410-345-2124, or Rajiv Vyas, +1-410-345-6559, all of
T. Rowe Price
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