Planning for Retirement
March 1, 2007
There’s no time like the present to start a retirement savings program. Consider these options, and remember to consult a financial planning, tax, or legal expert to ensure that you understand the details, rules, and restrictions.
IRA (Traditional) People 50 or older by the end of a calendar year can contribute an additional $1,000. There’s no deduction phase out if neither the individual nor spouse is covered by an employer-sponsored plan. Contributions for 2006 can be made until April 16, 2007.
Contribution limits: $4,000 for a single person or $8,000 for a couple filing jointly (same for 2007)
IRA (Spousal) If your spouse participates in a retirement plan through work, you receive a full tax deduction on your contribution to your own IRA if your joint adjusted gross income is less than $150,000. The deduction is phased out gradually up to $160,000 in joint adjusted gross income. You can contribute an additional $1,000 if you’re age 50 or older by the end of a calendar year. Contributions for 2006 can be made until April 16, 2007.
Contribution limits: $4,000 (same for 2007)
Simplified Employee Pension Plan These plans are simple to set up and administer, making them very popular with independent contractors. SEPs work like a traditional IRA but have higher contribution limits. Employers offering a SEP don’t have to include employees in the plan for their first three years of employment.
Contribution limits: 20% of self-employment income or 25% of compensation for employees, up to $220,000 in income ($225,000 for 2007)
Solo 401(k) These plans apply only to independent contractors with no employees. The main benefit is the high level of tax-deductible contributions allowed. You can also borrow up to 50 percent or $50,000 of the plan’s assets, but the loan has to be repaid within five years.
Contribution limits:The first $14,000 of income, plus 20% of any additional income up to $220,000 in 2006. (The limits are $15,000 and $225,000, respectively, for 2007.)
Keogh Plan These plans can be set up as a profit-sharing plan or defined-benefit plan, which uses a formula (based on salary and years of service) to determine a participant’s annual retirement income. These plans aren’t very popular because they require a professional to set up and administer thanks to the additional IRS filings involved. Employers must cover all employees immediately.
Contribution limits: 20% of self-employment income or 25% of compensation for employees, up to $220,000 in income in 2006 ($225,000 for 2007)
Source: Marc Jacobson, Marc Jacobson & Associates, Northbrook, Ill.
Updated: June 18, 2018