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Retirement Saving for the
Self-employed -- Part V
If you work for yourself, you're far from alone. More and more women are taking the plunge, leaving their traditional jobs and joining the leagues of entrepreneurs flooding into today's market. Consider the following:
- In 1999, 9.1 million women owned businesses in the US, employing 27.5 million people and generating $3.6 trillion in sales.
- In the same year, women owned firms accounted for 38% of all firms in the US.
- By 2003, it is expected that 2/3 of all US businesses will be owned by women.
When you work for yourself, you must take a more active role in your retirement planning. However, there are options available to you.
In general, if you are self- employed, either full or part time, you can contribute to your retirement through a Keogh Plan> or a Simplified Employee Pension Plan (SEP). Both allow you to make tax-deductible contributions which you can invest in a number of vehicles. Additionally, the earnings in the plans grow tax-deferred over time. All money you put into a Keogh or SEP plan must be self- employed income. It can come from freelancing, consulting, sales, or any other way that you make money independently.
Let's take a closer look at each now.
A. Keogh Plan
Keoghs allow unincorporated, self-employed business owners to place tax-deducted earnings into a tax-deferred retirement account.
HerTip: Regardless of what other plans you participate in, as long as you receive self- employed income, you can use that money to open a Keogh Plan.
How it works:
Keoghs allow an entrepreneur to put away income in the form of a Defined Contribution Keogh or a Defined Benefit Keogh.
A Defined Contribution Keogh is the more popular option, allowing the entrepreneur to set aside a fixed amount per month for her retirement. It is the simpler of the two plans.
A Defined Benefit Keogh is less popular, and can be a bit more costly to establish and maintain. In this case, the entrepreneur must project a defined benefit at retirement and then contribute enough money while working to fund that benefit.
HerTip: A Defined Benefit Keogh can be more beneficial to older workers than a Defined Contribution Keogh because it enables you to make a significantly larger contribution at one time.
Not only are Keogh plans available if you are the sole employee of your business, but they are also available to others who work for you. In general, you must contribute to the Keogh at least the same percentage of income for your employees as for yourself.
Unlike an IRA, all Keogh recipients must open their accounts by December 31 of the year in which they will file for the deduction. But, employees covered under a Keogh can borrow up to 1/2 their vested balance, up to $50,000, which must be repaid over 5 years.
HerTip: While you must open the account by year end to be eligible for the tax deductions, you can make contributions or additions to your existing account, any time up to April 15 (plus extensions.)
Pay-out:
Keogh plan pay-outs are always subject to income tax. Much like the other retirement plans we discussed, you will pay a 10% penalty if you withdraw funds from one of these plans prior to age 59 1/2.
HerTip: By taking your money out when you have stopped working, you generally have a lower tax rate applied to your earnings.
B. SEP (Simplified Employee Pension Plans)
SEPs are similar to Keoghs, but are easier to open and involve much less paperwork. Like a Keogh, a SEP allows unincorporated, self-employed business owners to place tax deducted earnings into a tax-deferred retirement account. To provide a SEP for their employees, an employer must have 25 or fewer workers who are considered eligible for the plan during the prior year. 1/2 of all eligible employees must agree to participate before the plan becomes effective.
How it works:
For an employee, a current maximum contribution of about $9,000 per year applies to SEPs. All of an employee's contributions are immediately fully vested, and an employer usually matches part or all of the investment.
Her Tip: An employer may earn a tax deduction for contributing up to 15% of its employees' wages.
Like an IRA, and unlike a Keogh, you can set up and fund a SEP until April 15 (plus extensions) to qualify for a tax deduction for the prior year.
Pay-out:
As with other pension plans, you may pay a 10% penalty to income tax if you withdraw your money from a SEP before age 591/2. Additionally, you cannot borrow against SEP assets.
Continue to: Part VI: Investing Your Retirement Money
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