The One-Man (or Woman) 401(k)

Congress gave small business owners a little-notic

Here's some little-noticed tax information that may have slipped by you: the recently approved federal tax law allows one-person businesses to sock away large sums of money in 401(k) plans starting next year.

Prior to passage of the Economic Growth and Tax Reconciliation Relief Act of 2001, it made little sense for those who were in business for themselves to set up a 401(k) because other plans like Keoghs, Simplified Employee Pensions (SEPs,) Simple plans, and even individual defined-benefit pension plans provided an easier solution to put away tax-deductible dollars.

Now, says Marcy Supovitz, senior managing director of retirement markets at Pioneer Investments, two major tax law modifications have made solo retirement savings plans appealing. First, under the old law, the maximum deductible contribution in a 401(k)--with an employer and employee contribution combined--was 15%. That has now been raised to 25%. Second, and perhaps more important, the method of calculating the deduction limit changes next year as well. Salary deferral contributions no longer count in the 25% limit. "So a 401(k) becomes a very big advantage for that one-person business that wants to put away more for retirement than it can under other types of plans, the most common being SEPs and Keoghs," Supovitz says.

To help advisors and consumers take advantage of this new tax provision, Supovitz and her team at Pioneer have designed a retirement plan exclusively for businesses that employ only owners and their spouses. It's called the Uni-K Plan. Uni-K setup kits become available this month, but contributions aren't being taken until January.

Any business that employs only owners and their spouses--including S corporations, C corporations, partnerships and sole proprietors--can use the Pioneer product. In some cases, the plan can also include part-time employees who work fewer than 1,000 hours per year, Supovitz says.

$100 Gets You a Plan

A sampling of some business owners who should consider the Uni-K includes real estate brokers, freelance writers, graphic artists, lawyers, accountants, and investment advisors themselves. "If investment advisors are in business for themselves and they pay their own Social Security taxes, then certainly they can look at this Uni-K," Supovitz says.

Some advisors just can't wait to get their hands on the Uni-K because it's cheap, costing only $100 per year. It has none of the administrative complexities normally associated with a 401(k) plan. Not to mention the fact that it creates a new market niche for advisors to pursue. While 401(k) plans are typically complex to set up and administer, the complexity essentially disappears for a one-person business. Setup and administration is as easy and affordable as a Keogh account. The business owner will need an approved plan document and, once account assets reach $100,000, will need to file an annual IRS Form 5500 EZ.

"[The Uni-K] meets a segment of the market that wasn't being met before, and for us it creates another nice market to go after," says Sean Patton, a financial advisor with Prudential Securities, Inc. in Rochester, New York. Patton says he's going to rush out and tell his accountant buddies about the Uni-K plan so they can start sending him referrals. "They certainly run across clients on a daily basis that this would be perfect for."

Patton says as doubts continue over whether Americans will be able to fall back on Social Security in retirement, Uncle Sam has tweaked the tax laws so "folks have the ability to put more dollars away so there's not that feeling that you have to count on Social Security."

And there's certainly no shortage of small business owners to choose from. According to 1997 Census Bureau statistics (the most recent available), nearly three quarters of all U.S. businesses, or 15.4 million firms, are one-person shops.

Bill Sharp, a planner with Con-

servative Financial Services in Farmington, Missouri, whose firm does a lot of small business retirement planning, is also impressed with the opportunities presented by the Uni-K. "This product is affordable, easy, convenient, and will really increase the opportunity" for people to stash more retirement dollars away, he says. "The small business investor has gone after the Simple in a very big way, but compared to the Simple, the Uni-K raises the limit substantially. It's a plan that's inexpensive, and is no hassle to maintain the way Pioneer is doing it. I wish it were New Year's already!"

Socking It Away

Pioneer's Supovitz provides the following example of how more money can be put away in a 401(k) than in a SEP or Keogh under the new tax law. With a SEP, the maximum tax-deductible contribution would be $15,000, and with a profit sharing plan or money purchase plan, or Keogh, the amount is $25,000. But with the Uni-K, the deduction limit goes up to $36,000.

For individuals over age 50, the new tax law allows an additional $1,000 contribution, so the deduction limit jumps to $37,000. "It's an additional $12,000 in tax-deductible contribution that they can put away," Supovitz points out. And the benefits only get better as one's income decreases.

If a one-person firm had a $50,000 income, the most the proprietor could put away with a SEP is $7,500. With a profit sharing or money purchase plan, the maximum is $12,500. But with the Uni-K plan, if the proprietor is over age 50, he or she can put away $24,500, which amounts to 49% of the firm's income. "People over 50 become focused on the need to put away [more cash] and catch up for lost years," Supovitz says.

Time to Consolidate

Another change in the tax law allows existing retirement plans to be rolled over into a 401(k). This includes rollovers and transfers from traditional IRAs, SEPs, Simples, Keoghs, and defined benefit, 401(k), 403(b), and governmental 457 plans. "For the small end of the [retirement] market, this [Uni-K] is a wonderful place where people are going to consolidate their plans that they've had elsewhere," Sharp says. "We are excited about the consolidation feature because so many small business people come in and say they've tried this plan and that plan. What's most exciting is that you take a small business person and they've got all these different plans, and they are probably not operating terribly efficiently because they kind of get orphaned and forgotten about. The new law and this [Uni-K] product gives us an opportunity to bring all these [plans] together under one umbrella."

A further benefit to one-person businesses under the tax law is the ability to take loans from a 401(k). The Uni-K, Supovitz says, allows you to take loans, which is prohibited in a SEP.

"So if there's an unforeseen circumstance where you may want access to that money," Supovitz notes, "you can have the ability to get a tax-free loan under the IRS rules."

Keeping It in Place

Under the old tax rule, sole proprietors and partnerships in S corporations were not allowed to take a loan, and under the new law they now have that opportunity. SEPs, however, still do not allow loans under these circumstances. "The best feature the 401(k) offers is the loan feature," Sharp says. "You find that there are a lot of small business people who have a lot of money in IRAs and SEPs that are pretty well locked in. Here's an opportunity for someone to take an IRA that cannot be accessed, roll it over into her 401(k) that can be accessed, and make a loan for herself. For a small-business person, that could be very valuable. They can keep their retirement plan in place, but at the same time access the money for legitimate business needs they might have."

The Uni-K's investment choices are made up of Pioneer mutual funds. Supovitz says Pioneer has been educating advisors about the new tax law changes at the Pioneer Retirement Plan University, which has been up and running for four years. Within a few weeks of the tax laws being passed in June, she says, Pioneer brought in advisors from all over the country to talk about new opportunities created by the law. "We have no doubt that other investment firms are scrambling to do this, but at this point there is no other firm that has the Uni-K," Supovitz says. Information about the Uni-K is available at Pioneer Investments' Web site, located at www.pioneerfunds.com.

Now is the time for investment advisors to help one-person business owners plan for how they are going to take advantage of these tax changes come January.

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