Feed on
Posts
Comments

Retirement Investing - Which Self-Employed Plan Is Best For A Growing Business

November 11th, 2006 by Papabear

As I’ve said before, choosing the right retirement investing plan for yourself can be a pain in the neck, and a decision you probably shouldn’t make on your own, due to the tax implications as well as the need to determine what’s financially best for you in your situation.

While choosing a retirement investment plan might be fairly easy if you have a sole proprietorship that brings in a limited amount of income, the more successful your small business is, the more choices become available and the more variables you must consider which will affect your decision.

For example, you may have incorporated your business, you could have employees, or you could be making an awful lot of money (don’t we wish!). You could also have a job, in addition to your business, or be over 50. All these variables, plus more, can significantly affect what self-employed retirement investing plan is best for you.

For the self-employed, Keogh plans are the equivalent of big time corporate retirement plans, like the pension plans our parents counted on. Keogh’s can be set up either as profit-sharing plans or defined benefit pension plans

Annual contributions to a Keogh profit-sharing plan are based on a percentage of your self-employment income (or the salary you make as an employee of your own corporation) with a $44,000 cap on contributions.

On the other hand, if you choose a defined benefit pension plan, your contributions are based on your targeted retirement benefit. For example, if your goal is to get a $50,000 a year pension, your contributions will be based on what it will take to achieve that goal, including your income, your age, and the assumed return on your investments. (You can have a Keogh set up to give you as much as $175,000 a year.)

However, because you have a targeted goal, you have to contribute whatever it will take to achieve that goal. If you have a bad year, your contribution won’t decrease, no matter the effect on your income. The upside is that, if you haven’t done much retirement financial planning, are getting closer to retirement age, and are making really good money, the Keogh can be a way to catch up fast because it allows you to contribute so very much more to your retirement than any other retirement program.

Do keep in mind, though, that should you choose a Keogh and have employees, you will have to make contributions for them as well, which may affect the amount you’ll be able to set aside for yourself. So make sure you get professional advice before making your retirement investment planning choice.

    • Posted in Retirement Investing | No Comments »

    Retirement Investing - Yes You Can Retire From Your Own Job

    November 9th, 2006 by Papabear

    A lot of times, people who are self-employed are so busy running a business, they don’t stop to think about retirement investing and financial planning. If they think about it at all, they may think the business will continue to bring them income after they retire. Or they think in terms of selling the business eventually and using that money to fund their retirement. Or perhaps their business is simply so dependent on what they themselves do, such as freelance writing, that retirement simply doesn’t seem to be an option, so they hardly think about retirement investing and their business at all.

    However, there are many tax-free self-employed retirement plan options available nowadays. For example:

    Simplified employee pensions (SEP) let you contribute…and deduct…up to 20% of your self-employment earnings (25% if you’re an employee of your own corporation), up to $44,000 a year.

    Keogh plans are a lot more elaborate, and can be either profit sharing or defined benefit pension plans. Keogh’s also allow tax-free contributions up to $44,000 a year for the profit-sharing option. Defined pension plan contributions have to be determined by an actuary and depend on your income, your target benefit (which can be up to $175,000 a year!), the number of years until your retirement and the anticipated investment returns. Obviously Keogh’s are more expensive to administer than other options.

    An individual 401(k) plan lets you contribute up to 100% of the first $15,000 of your annual self-employment earnings/income (up $20,000 if you’ll be 50+ by the end of the year). In addition, you can also contribute and deduct another 25% of your salary (if you’re an employee of your own corporation) or 20% of your self-employment income.

    And…if you want to put aside a little bit more and are willing to pay taxes now, rather than later, there’s always the Roth IRA in addition to whatever tax-free or tax deferred plan you’ve decided on. You’ll have to pay taxes on your Roth contributions, but your earnings will be tax-free! And, yes, you’ll only be able to contribute up to $4,000 a year ($8,000 if you’re married or $5,000/$9,000 if you’re 50+), but a Roth allows you to add to your retirement investing, and you’ll be able to withdraw all that Roth money when you retire and won’t have to pay a cent in taxes.

    Not preparing for retirement when you’re self-employed is like not planning to pay the bills for your business. Sure, you can do it. But why? Think of all the trouble you’ll make for yourself. And just like all the other things you know you need to do for your business, the key is to get started as soon as possible.

    • Posted in Retirement Investing | No Comments »