Retirement Plans: Scrambled, Fried, Boiled or Raw?


So you didnt marry that high school sweetheart who turned into a billionaire and that brilliant business idea you had that was going to make you rich didnt quite pan out as expected. So what else is left in that chocolate box of retirement options? Like an egg, you can cook retirement plans in lots of different ways.

Start with the simplest plan of all: the traditional, deductible IRA. Assuming you or your spouse has enough earned income, you may deposit up to $5,000 and deduct it on your 2011 tax return as long as the money is in the bank by April 15, 2012. And if you are over age 49 on Dec. 31, 2011 you even get an additional $1,000 you may deposit under what I call the geezer pleezer provision. Your spouse may also deposit and deduct the same amount. If you start now, and put in $800 or $900 each month you will have the full amount by April 15. But remember, you are taking the deduction now, which means you will have to pay tax on everything you withdraw later; if you remove funds before age 59�, there will usually be an additional 10% penalty. There is no minimum age to open an IRA, although there is a maximum age of 70 to contribute to the account. There are other issues to consider, primarily whether you are already covered by another pension plan, so talk to your tax advisor about that one.

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The Roth IRA uses the same $5,000 limit as the traditional IRA, but you give up the ability to deduct it on your tax return. Of course the payoff is that you do not have to pay tax on a Roth IRA when you withdraw the money if it has been in the account for at least five years under normal rules. A nice advantage of the Roth IRA is the ability to continue to make deposits to the account after age 70, assuming you have earned income. One of my favorite, little-known Roth IRA benefits is that it retains its tax-free characteristics for any of your heirs, so once you hit that magic five-year, tax-free holding period, you can die knowing Uncle Sam isnt getting this one!

What about self-employed people? There are three plans out there that usually apply: SEP-IRA, SIMPLE-IRA and the Single or Solo 401(k.)

The SEP-IRA allows you to deposit the lesser of 25% of your business income or $49,000 for 2011, and you actually have until the extended due date of your 2011 return to both establish and pay in any deposit, so for most self employed people have until Oct. 15, 2012 to make the deposit. The calculation is a little complex, so dont try to do this one at home! Can you have both an SEP and a traditional IRA? In some cases yes, but check with your tax advisor to be sure. With a SEP-IRA you will probably have to also contribute for any of your full-time employees who are 25 or over who have worked for you for at least three years, at the same percentage as your deposit. A nice advantage of the SEP-IRA is its ability to change what you deposit every year. This means you can put in any amount for 2011, up to the limit, without any requirement to deposit a dime, and then next year you have the exact same flexibility again! The disadvantage of the SEP is pretty clear-if you decide to deposit anything for yourself you have to deposit the same percentage for everyone else who qualifies during the year, even if they are no longer working for you.

The SIMPLE-IRA is actually a hybrid type of plan because both the employees and the employers participate. We find it the most popular small business plan because of the employee participation feature. For 2011 the employee may defer, tax-free, the lesser of whatever they make or up to $11,500, and if over age 49 at the end of the year they even get a $2,500 catch-up amount. Of course the employee may choose to contribute any amount they wish that is less than $11,500 as well. The employer has two choices for matching, but in my real-life experience they always choose the 3% match rule. This means the employer must deposit the lesser of what the employee has deposited or 3% of the employees gross pay. If the employee does not choose to save anything, the employer does not make a deposit for them. The employer is allowed to deposit more than 3% if desired, as long as they deposit an equivalent percentage for all employees. One drawback of the SIMPLE-IRA is that it must usually be established by Oct. 1 of the first year it is to be used.

The Single or Solo 401(k) (they are the same thing) has many of the features of the SIMPLE-IRA with a few key differences. The solo 401(k) may only be used by small businesses whose only employees are the owner, family members and part-time or younger employees. The employee may defer any amount from zero up to $16,500 for 2011, plus an additional $5,500 if they are over 49 at year end. The employer may then put in a profit sharing amount of up to 25% of the employees gross pay, limited to a maximum contribution from both parties of $49,000 this year.

Retirement planning doesnt have to be hard, it just requires a little knowledge, a little desire and the decision making to get it started, so run, Forrest, run down to the bank or mutual fund and get that account open this year.

Bob Jennings is a CPA, EA and CFP and author of Understanding Social Security & Medicare His website is and he can be followed on Twitter @Jenningsseminar