Retirement Planning: Your Business Plan for Retirement, part two

As I explained in part one of this series, more than just a great business idea makes a business successful. More than simply wanting to strike out on your own, make money as your own boss and create a reality out of a vision, a business, now matter how big or small must have an exit strategy for its creator. It might be a legacy, a business that you would like to see passed on to your heirs. It might be a stepping stone to bigger and better opportunities down the road. But what it should be, all things dreams of success aside, is a bridge to the day when you are no longer working.

To consider retirement at the onset of your company's creation is paramount to that goal. We may say we are working for the glory and the independence, the profits and the satisfaction but in truth, we are working for the payoff.

While the solo 401(k) is designed for the business of one, often times that business will grow to include other people. Product lines expand as your success grows. Contracting out work can be a temporary stopgap yet if you would like to see your business grow to entice more customers and control the quality of your projects, you may need to hire people to work with you in those goals, folks who share your ideals and passions, the same people who, because of their dedication will also be deserving of a piece of the profits generated.

A SEP-IRA can fill those needs nicely. But like all taxable events, the rules need to be followed. SEP-IRA or self-employed pension individual retirement account allows you, the employer of one or more, to share in the profits of your business by making contributions to this type of plan.

It acts just like a traditional IRA would with added feature of shifting contributions. In good years, the plan can allow contributions of up to $49,000 per employee. This contribution is tax deductible for the business and the growth of those funds is tax deferred. In years when the business profits falter or are simply subject to cyclical changes, the contribution can be lowered or eliminated completely.

SEP IRA is a retirement plan designed to benefit self employed individuals and small business owners. Sole proprietorships, S and C corporations, partnerships and LLCs qualify. In those circumstances, the company pays the business owner (you) a W-2 salary. In this situation, the annual SEP IRA contribution can be between 0% to 25% of the owner's W-2 salary up to the SEP IRA contribution limit. The caveat: you must also contribute to your employees the same percentage as was contributed to yours.

The contribution limits are slightly lower for an unincorporated business such as a sole proprietorship, unincorporated partnership or a LLC electing to be taxed as a sole proprietorship. In this instance, annual contributions are made into your SEP IRA account between 0 to 20% of your net adjusted self employment income. Either way, these are hefty savings allowances compared to the limits placed on other types of retirement plans.

One important thing to consider though: having a solo 401(k) as well. because a SEP-IRA is dependent on profits and if you have employees, sharing those profits with them, a solo 401(k), allowable as well alongside the SEP-IRA, gives you another opportunity to put away money for retirement from your income, which may not be reliant on the profits of the business.

Eligible employees must be at least 21 years of age and have worked for you for at least three years of the last five years. SEP-IRAs are easy to set up and cost effective, may have little or no paperwork to file with government and could net you a tax deduction of up to $500 for the first three years of the plan. Plans are administered by the employer through a mutual fund company. generally offering a simple basket of funds from which to choose.

While plan participants cannot borrow against their SEP-IRAs, they may roll them over to another qualified plan. And like all IRAs, are subject to the same withdrawal penalties and restrictions on age.

Next up: The simple IRA and the solo defined benefit plan.

G is for Gross Income - Retirement Planning

We continue our look at some of the important factors of a good retirement plan. This alphabetical look at what you need to know continues with a look at gross income.

In Retirement Planning, G is for Gross Income

There are very few downsides to owning a Roth IRA. Of course there is the tax advantage. After five years, the money can be withdrawn tax-free. Unlike a traditional IRA, all of the withdrawals are taxed at your regular income. (The reason for this difference is based on whether the money was taxed prior to deposit – traditional IRA deposits were a deduction from taxes whereas a Roth IRA is funded with after tax contributions.)

A traditional IRA requires you to take withdraws by age 70 ½ (actually the date is April 1st in the year following your 70 ½ birthday). A Roth does not have any such requirements, allowing you to keep the money invested until you need it – if ever. And that “if ever” allows you to pass the Roth IRA on to your heirs who, although they would be required to take distributions, would find the added income from the inherited Roth IRA would be tax-free.

While there is no guarantee that your Roth IRA will grow without set-backs – what you pick for your investments determines the portfolio’s possibilities, the ability to save more is restricted not only by age but by gross income.

Age and Income

Your contributions before you reach fifty-years-old are limited in both the Roth IRA and the traditional IRA to $5,000. But after fifty, the annual contribution jumps to $6,000 with adjustments being made thereafter based on inflation.

But gross income also plays a role in how much you can contribute. More specifically, modified gross income. If you are single, that income cannot exceed $101,000 and if you are married, filing jointly, the income limit is set at $159,000. Modified gross income is calculated using IRS publication 590 (turn to page 61) and does not include any Roth conversions you may have made in the current tax year.

What if you make too much? It is a nice problem to have but to avoid not investing at all, the IRS allows you to make non-deductible IRA contributions. Conversions have income limits as well ($100,000 a year for individual or joint filers – sorry, married filers filing separately re not allowed to convert). But hold onto the non-deductible IRA until 2010 and convert without penalty.

There are still taxes to be paid on the conversion however but they can be spread over the following years (2011 and 2012).

A is for Asset Allocation

B is for Balance

C is for Continuity

D is for Diversity

E is for (Tracking) Errors

F is for Free-Float

Retirement Planning and Future Calculations

The internet is littered with a wide variety of calculators, many of which are designed to help you focus on a certain goal. Many are just flat out depressing.



As we have found out, retirement planning is more than just saving money. It is a strategic position, a plan for all of the possible things that could go wrong from health issues not only for you and your family but job interruptions, career changes and forces that exert a certain pressure of which we have little or no control.

Inflation and taxes play a huge role in how we plan but they are almost completely unpredictable. Nonetheless, the calculators still try to paint a picture that will best, and in most cases, sell an idea, product or company that can help you attain that dream. Charles Schwab is no different.

The company is hoping that more companies will begin offering a Roth inside of a company’s 401(k) or defined contribution plan. But is a Roth good for everyone?



Not necessarily. The differences in the two types of retirement plans are based on the way taxes are handled. If you assume that you will be in a lower tax bracket when you retire, sticking with the traditional form of 401(k) will still be the best choice. It provides you with the same contribution opportunities as a Roth 401(k) would but may, especially in the lower income brackets – below $100,000 income, provide you with a better funded paycheck.

Once you get above the $100k limit, a Roth might serve you better.

The calculator that Schwab offers can give you some indication of the differences although it does not calculate the net result of inflation on those contributions nor does it discuss investment options or the fees associated with those investments.

If you use the tool, be sure to check the box at the lower right hand corner. It might give you a more accurate read on where you might be going and whether it is worth changing. If you can take home 9% more now and use that money to control your debt and even increase your emergency savings, a Roth may not be the best option.