Saving For Retirement: Itís Not Too Late For Baby Boomers
By Karen Shapiro-9569
The tax filing deadline may have passed, but many small business owners, professionals, and the self-employed still feel the pain of writing big checks to the IRS. Many of those same people are baby boomers who havenít saved enough for their retirement, and are wondering how they can catch up.
After tax-season is an ideal time to consider an amazing tax-deferral vehicle -- the very small business pension plan. Surprisingly, this is still a little known way for the self-employed to legally defer taxes on up to 100% of their income when they save it for retirement, paying taxes on it only when the money is withdrawn to use later in life.
The story: A very small business pension plan is a defined benefit plan for 1-5 person companies or individuals with self-employment income (even employed people who earn self-employed income on the side qualify). The amount of money that can be contributed annually is not limited to $50,000, as would be the case with a defined contribution plan like a small business 401(k). Nor is it limited by the amount of your current year earnings (the contribution may not be limited by the earnings, but the tax deduction is limited to current year earnings). Instead, the contribution to a defined benefit plan is determined based on age, years to retirement and the average of the three highest years of earnings.
The result: If you are self-employed, own and run a small company with up to five employees, or have a substantial side income from consulting or directorís fees,
you may be able to contribute - and deduct from income Ė $180,000 or even more each year! We are talking about truly HUGE tax deferrals - more than enough to start retirement years earlier.
The details: There is no specified limit on your contributions. Instead, the limit is on the allowable benefit, not the contribution. The benefit is the amount your plan will pay out annually in retirement, and that can be up to an average of your three highest years of income up to $180,000 a year. The contribution is what you pay in each plan year. In general, you can contribute up to the amount you need to accumulate the funds to pay you the specified benefit after retirement. So, for example, a 52 year old that plans to retire at age 62 with an annual income of $200,000 can contribute Ė and deduct from his taxable income each year as much as $169,476 each year for an estimated annual tax savings of $67,790.
And thatís not all. Contributions
invested in virtually any traditional investment vehicle, from stocks
and bonds through mutual funds and annuities. When you retire, you
have all the options of any other kind of retirement plan, including rolling the planís assets into a Rollover IRA. And,
of course, contributions to the plan grow tax-deferred until you take a distribution.
are no onerous restrictions on you either. You can stop the plan at any age and
roll the value of your benefit over to an IRA. Routinely, however, a plan is
expected to be maintained at least 3 years and the earliest retirement date is age 55.
Of course, not everyone qualifies. This program
is designed for self-employed people age 45 or older, with no more than five
employees, and who typically earn at least $75,000 a year from their work. And
of course, to get their retirement savings caught up to the amount they will need, they must be willing
to make a significant contribution each year for the life of the plan.
really nice thing is that eligible people donít have to be pension experts to
make this work. A completely packaged program, OnePersonPlusģ is available from
financial advisors that work with Dedicated Defined Benefit Services, the company
that designed and offers the plan. Some of the advisors offering the plan work
with The Hartford, Oppenheimer Funds, and Pioneer Funds, but investors with a
preferred advisor should ask them to run an illustration at www.onepersonplus.com
or call 1-866-269-2706 to speak with a defined benefit plan consultant.
is the right time to learn how to get rid of the after tax-time blues so you
can get caught up on your retirement planning in just a few years.