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  Self-Employed Retirement
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Since many of our clients are self-employed, we are approached often regarding the establishment of retirement accounts.  Individual Retirement Accounts obviously limit you to only $4,000 which many small business owners consider insufficient when trying to reach their retirement goals.  There are other plans available to small businesses which will allow greater contributions and we will examine a few of those options here.

SEPs -- Simplified Employee Pensions

Simplified employee pensions allow you to contribute and deduct up to 20% of self-employment income. 

Currently, the maximum annual contribution is $45,000. The percentage can be varied each year, so lower amounts (or nothing at all) can be contributed in years when cash flow is a problem.

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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