If you are self-employed, you can reserve a substantial part of your earnings tax-deferred.
Get game-changing answers to your enterprise questions.
Q: What business retirement plan do you recommend for those who are self-employed?
A: I would recommend you check out a KEOGH retirement plan. This might give you the capability to make significant contributions to the plan–upwards of $165,000 each year (it rises to $170,000 for 2005).
A KEOGH retirement plan is established by a self-employed person, and it offers tax-deductible contributions and tax-free income accumulation (growth) until withdrawn. You might setup your own KEOGH plan and donate to it without advance approval. However, advance approval is advisable, and you’ll ask the IRS in a determination letter to examine the plan.
There are two types of plans:
Defined-benefit plan: This type of plan provides beforehand for a particular retirement benefit, funded by quarterly contributions predicated on an IRS formula and actuarial assumptions.
- This might prove costly in case you have older employees who should be given proportionate defined benefits.
- It needs that you donate to your employees’ accounts–even if you don’t have profits.
- These plans are for those who are able and ready to put away a lot more than $41,000 each year. The precise amount you can contribute depends on the results of an actuarial analysis for every individual employee.
The utmost annual retirement benefit under a defined-benefit plan might not exceed completely of the participant’s average compensation for the three consecutive years of highest compensation as a dynamic participant, or $165,000, whichever is less (it rises to $170,000 for 2005). This limit may need to be reduced if benefits begin prior to the full Social Security age, currently age 65. For defined-benefit plans only , the very least coverage rule requires a plan must benefit at least the lesser of the next; either 50 employees or the higher of 40 percent of most employees or two employees.
Defined-contribution plan: This sort of plan will not fix a particular retirement benefit, but instead sets how much annual contributions in order that the amount of retirement benefits depends upon both contributions and income earned on these contributions.
Defined contribution plans may take either of both following forms, or a combined mix of both:
Both defined-benefit and defined-contribution plans might take into consideration Social Security benefits for employees. KEOGH plans enable Social Security integration, effectively allowing those available who are high-income earners (usually the owners) to get larger percentage contributions because of their accounts compared to the less highly compensated employees. The logic behind this notion is that Social Security taxes top out once you earn much more than $87,900; Social Security allows self-employed companies (and key employees) who earn more than this amount to replace this ceiling.
Note: The info in this column is supplied by the writer, not Entrepreneur.com. All email address details are general in nature, not legal services rather than warranted or guaranteed. Readers are cautioned never to rely on these details. Because laws change as time passes and in various jurisdictions, it really is imperative that you consult a lawyer in your town regarding legal matters and an accountant regarding tax matters.
David Meier may be the founder and COO of Business Development Coaching, a company that delivers small-business owners with ongoing business coaching.