SEPs can be opened up as late as the extended due date of your income tax return.
Finally, SEPs are much simpler to establish and administer than Keogh profit-sharing
and pension plans. No annual government reports are required, and ongoing administrative
expenses are negligible. SEPs are just as easy as deductible IRAs, but they
allow much larger contributions.
Keogh Plans
Keogh plans come in two basic forms: profit-sharing plans and defined benefit
pension plans. To get a deduction for the current tax year, the plan must be
established before year's end. Once that's done, actual contributions can be
deferred until the extended due date for that year's return.
Annual contributions to Keogh profit-sharing plans are based on a percentage
of self-employment income (up to 25% versus 20% for SEPs) subject to a $45,000
ceiling. Lower percentages are acceptable, also. A plan document must be drafted
in Year One, and the IRS requires an annual report
Keogh defined benefit pension plans are designed to deliver a targeted annual
retirement benefit, which can be as high as $180,000. Each year's contribution
must be calculated by an actuary the exact amount depends on your income,
the target benefit, years until retirement and anticipated investment returns.
Annual actuarial fees and the required IRS report can be expensive.
Also, you're
locked into making the actuarially determined contribution each year. However,
if your income is high and you are over 50, a defined benefit plan may be worth
all the trouble and expense because it permits significantly larger contributions
than any other type of program. Individual
Retirement Accounts - IRAs Standard
IRAs
If you have a Keogh or SEP plan for yourself but your spouse isn't covered by
a qualified retirement plan, he or she can make a deductible IRA contribution
up to $4,000 as long as family AGI is below $150,000. (The deduction
is phased out between AGI of $150,000 and $160,000.) Note: Contributing to a
Roth IRA will usually save more taxes in the long run.
Roth IRAs
Contributions are nondeductible, but earnings build up tax-free. Contributions
up to $4,000 are allowed ($8,000 for couples), subject to phaseout between adjusted
gross income of $95,000 and $110,000 for singles ($150,000 and $160,000 for
joint filers).
The same relatively generous thresholds apply even if you have
a SEP or Keogh plan (and even if your spouse is covered by a company retirement
plan at work). So you can contribute the maximum amount to your SEP or Keogh
and then contribute an additional $4,000 (or $8,000 joint) into a Roth IRA. Other
Considerations
If your business has employees, a SEP must cover them as well. All employee
SEP contributions are immediately 100% vested. With both Keogh profit-sharing
and pension plans, employees cause lots of complications. The tax guidelines
may require you to contribute money on their behalf while limiting contributions
for yourself. The existence of employees means you should consult a good employee
benefits professional before initiating any type of retirement program. This
is just a brief rundown of the retirement options you may want to
consider. There are bills presently before Congress which will
actually raise some of the contribution limits discussed above for IRAs
and 401(k) plans. Please give us a call if you would like to discuss
any of these options in greater detail. We can examine where you are
now and where you need to be at retirement as well as the best strategy
available to get you there.
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