All people earning net income are allowed to fund a retirement plan. The tax law differs on whether the retirement plan contributions are deductible or not. Withdrawals from current retirement plans are always taxed at the person's current tax rate. Plus, there are penalties for early withdrawals (under age 59 ½).
Many small businesses are run as sole proprietorships. This means they are running the business by themselves without incorporating or forming a partnership. The individuals involved file a Form Schedule C with their regular income tax return (Form 1040). People with a net income on Schedule C may fund a retirement account. They may choose a IRA, a SEP-IRA, a SIMPLE IRA, or a KEOUGH plan.
These retirement plans also work for small businesses with employees. An important definition is that you are an employee of your company, even if you are a sole proprietor.
Small businesses run as partnerships and corporations may also have these retirement plans. Corporations also have the choice of creating 401(k) plans. The problem with 401(k) plans is that the costs associated with them are very high. These other retirement accounts have very low costs associated with them.
IRA plans for 1997 allow individuals to contribute up to $2000 of net income. Spousal IRAs are also allowed even if the spouse has no earned income. An IRA is deductible if the person or their spouse is not covered by another retirement plan, or if their income is below a certain level (quite low).
SEP-IRA's (Simplified Employee Pension-Individual Retirement Account) were created to allow self-employed people to contribute more than $2000. SEP-IRA's allow self-employed people to contribute up to 13.04 per cent of their income (up to a pre-determined maximum) to a retirement account and take a deduction off of their total income (deduction entered on Form 1040). The contribution can be made anytime before the filing of the tax return or Apr.15 of the following tax year. The SEP-IRA can be created up until Apr.15 (or your filing date).
SIMPLE IRA's were created in 1998 to replace many SEP-IRAs. SIMPLE IRAs were meant to be closer to the traditional 401(k) plan. A total of $6,000 can be contributed by the employee and the employer can also contribute up to $6,000.
| Here's the follow-up discussion on this article: | View all related messages |
For a complete listing of article comments, questions, and other discussions related to Kirk Lindstrom's Investing/Personal Finance topic, please visit the Discussions page.