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Tuesday, 14 August 2007 |
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The traditional 401k plan that is sponsored by an employee doesn’t lend itself to tax deductions. Deductions are essentially reductions in the total taxable amount of income. Since most 401k’s are contributed to on a pre-tax basis, they aren’t considered income or an expense, and aren’t subjects to a deduction. The funds contributed to a 401k are called deferred wages. And therefore not counted as earned income. However, these funds are subject to Social Security, Medicare and federal unemployment taxes.
Although the normal employer-sponsored 401k isn’t subject to tax deductions, individual 401k’s are. Individual business owners have many retirement options available to them as well. The individual 401k appeals to many private business owners because they can easily rollover plans from former employers and, the contributions are a lot higher than with other 401k accounts. Contributions to individual 401k’s can comprise 25% of total earnings. Federal taxes aren’t placed on contributions; however, self-employment taxes are applicable. There are restrictions placed on the certain types of individual businesses tax deductions on a 401k they can receive. The amount of personnel and numbers of hours they work is an important consideration. Another consideration for the IRS is whether a business is incorporated or not. Both incorporated and unincorporated businesses can make deductions, but the former business type has more limits placed on it. Incorporated individual deductions can be made on business expenses. As for unincorporated companies, tax deductions on a 401k can be included with individual income. Recent government changes now allow persons related to the business owner and who are employed by the owner. These relatives include spouses, children and grandchildren. Tax deductions on 401k accounts can be granted when a participant buys company stock. Deductions are also allowed on bonds and on mutual funds. Certain restrictions may apply, however. Most employer plans allows 15 percent of the participant’s earnings to be deducted upon. Tax deductions are obviously a benefit to the individual. The money saved in income tax each year as well as the interest made makes tax deductions on 401k’s a welcomed benefit. |
