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A Common Error In Powers Of Attorney

When you’re self-employed, it’s often difficult to set aside money for retirement because every dollar is coming out of your own pocket. Yet if you don’t invest in your future, no one else will, so it’s important to make retirement saving a top priority. You can use one of several saving and investment vehicles whose features can help you gradually build a substantial nest egg. Consider these four retirement plans that are specifically geared to the self-employed.

1. Simplified Employee Pensions (SEPs): The main attraction of SEPs is that they are, indeed, simplified. For one thing, SEPs are generally exempt from stringent tax reporting requirements that apply to most other plans. As a “defined contribution” plan, deductible contributions for the 2011 tax year are limited to 25% of your compensation or to $49,000 ($54,500 if you’re age 50 or over), whichever is less. The maximum compensation taken into account for these purposes is $245,000.
Contributions to an SEP are discretionary, so you’re not locked into a specific amount for any year. However, if you have other employees, you have to make contributions on their behalf if they have worked for you for at least three out of the previous five years and earn more than a minimum level of compensation ($550 for 2011).

Like other tax-advantaged retirement plans, SEPs generally don’t permit distributions before you reach age 59½ (you’ll be assessed a 10% penalty and owe income tax on early withdrawals) and you must begin taking annual required minimum distributions, or RMDs, after age 70½.

2. Savings Incentive Match Plans for Employees (SIMPLEs): Many tax rules for SEPs also apply to SIMPLEs, which are likewise exempt from the usual tax reporting rules. But unlike SEPs, which let you contribute even if your business has another retirement plan, a SIMPLE must be your sole retirement savings vehicle, and SIMPLEs also have lower ceilings for tax-deferred contributions. For 2011, the maximum is $11,500 ($14,000 if you’re age 50 or older). But your business can elect to provide matching contributions to the plan, subject to nondiscrimination rules. You’ll have to contribute on behalf of any employee who has earned at least $5,000 during the preceding two years and who is expected to earn at least that much during the current year.
The general tax rules for early withdrawals and RMDs also apply to SIMPLEs. But there’s a 25% penalty on withdrawals made within the first two years of participation.

3. Keogh plans. At one time, if you were self-employed, the Keogh was the only retirement plan in town, but its popularity has waned now that there are other, generally simpler alternatives. The amount you can put into a Keogh each year depends on whether it’s set up as a defined-contribution or a defined-benefit plan. For 2011, the maximum deductible amount for a defined-contribution Keogh is the lesser of 20% of earned income or $49,000 ($54,500 if you’re at least 50 years old).
If you have a defined-benefit Keogh, your annual contributions will be computed actuarially to deliver a specified amount of retirement income. The plan may provide an annual retirement benefit equal to 100% of the average income earned during your three highest-paid years, or $195,000, whichever is less. Rules on RMDs also apply to Keogh plans.

4. Solo 401(k) plans. This staple of retirement planning for the employees of large companies used to be pretty much off limits to the self-employed, who were deterred by prohibitively high administrative costs. But now it’s feasible to operate a 401(k) for just one person (or for a sole proprietor with a few employees).
The maximum tax-deductible salary deferral allowed for 2011 is $16,500 ($22,000 if you’re at least 50). A major advantage of this plan for the self-employed is that it lets you combine contributions as an employee with matching contributions as an employer. This lets you reach the $49,000 maximum for retirement plans this year ($54,500 for those 50 and over).

Most other rules relating to contributions and distributions from defined-contribution plans also apply to solo 401(k)s. But if you’re the only employee, you don’t have to worry about tough nondiscrimination rules that normally apply to 401(k)s.

Any one of these retirement plan options might work for your business, but finding the best fit means taking a closer look at the details of each and considering its pros and cons for your enterprise. We can help you explore the options.


This article was written by a professional financial journalist for Legend Financial Advisors, Inc. and is not intended as legal or investment advice
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