The key to successful retirement planning for many self-employed individuals is a Keogh, which is typically easy to understand, implement and administer.
Self-employed individuals have it made. For instance, they may work from home where they enjoy the endless freedom that comes from being their own boss and making their own hours. However, this perception is actually misplaced for many. Many times, the realty of being a small business owner means having no benefits, limited vacation time, an unpredictable yearly income, and the frightening prospect of being unable to retire.
A financially secure retirement is a major concern for many people today and with good reason. The majority of people under age 50 years old believe that Social Security will not be there for them when they retire. Since today’s generation can expect to live longer than previous generations, the risk of outliving retirement savings is a real possibility for many. Inflation, which has averaged 4% over the last 30 years presents yet another obstacle in obtaining financial stability during retirement.
For self-employed individuals, the weight of these concerns rests solely on their shoulders. They are the ones who have to take an active role in implementing an effective retirement plan for themselves and their employees. The key to successful retirement planning for many self-employed people is a Keogh,which is typically easy to understand, implement and administer.
A Keogh is not an investment, but rather a qualified retirement plan used by unincorporated businesses such as proprietorships or partnerships. Individual contractors, lawyers, doctors, dentists and other self-employed workers should find that Keoghs are the right choice for meeting their retirement planning needs.
Keoghs come in three varieties:
- Profit Sharing
- Money Purchase Pension
- Combination Plans
Profit Sharing Plan
Allows for flexible employer contributions from year-to-year. The contribution percentage and dollar amounts may vary each year. The maximum contribution that may be allocated to any one participant is 15% of the participant’s compensation or $22,500, whichever is less. The employer may contribute up to 15% of the total compensation to all plan members.
Money Purchase Pension Plan
This plan has the potential to provide higher maximum contribution levels than the Profit Sharing Plan. However, once a contribution percentage is selected, it becomes mandatory every year. Contribution limits are 25% of each employee’s compensation or $30,000, whichever is less.
Combination Plan
This plan combines the flexibility of a Profit Sharing Plan with the maximized contribution levels of a Money Purchase Plan. Contribution limits are 25% of each employee’s compensation or $30,000, whichever is less. However, only the amount placed in the Money Purchase Pension portion of the plan is mandatory each year. The amount placed in the Profit Sharing portion may vary from year-to-year.
KEY KEOGH ADVANTAGES
A properly set-up Keogh plan has advantages for both self-employed small business owners and their employees. Current and ongoing tax benefits are most obvious. For the business owner, there is a dollar-for-dollar write-off as a business expense of the contributions made on behalf of the employee.
Contributions made to the employer’s individual Keogh account will reduce personal taxable income,which should result in a lower tax bill. In both the employer and the employee’s account, funds accumulate on a tax-deferred basis, and taxes are due only upon withdrawal of the contributions and earnings.
Compared with other plans, Keoghs permit contributions on a higher percentage of income. Having such an appealing retirement plan should not only attract potential employees, but may also deter current employees from leaving for a competitor offering a better plan. That’s not to mention that with a Keogh in place, the small business owner may one day be able to recognize the dream of a secure and financially viable retirement.
Be sure to check with a tax adviser to find out about the other features and benefits of a Keogh and to determine which retirement plan is the appropriate choice for your small business.” “Wayne Sholk is a Financial Consultant with the Smith Barney Office in Bloomfield, New Jersey. He is a licensed Financial Consultant and a licensed Health and Life Insurance agent. For more information, please contact Mr. Sholk at 201-338-3600.
