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Show Retirement plans By CURTIS G. MARSH Financial Consultant One of the few remaining tax shelters is "qualified retirement plans." These plans allow a business busi-ness to set aside money for retirement, retire-ment, deduct this amount from current cur-rent taxable income and invest the money on a tax-deferred basis. A common misconception about qualified plans is that they are limited li-mited to corporations. Qualified plans are available to anyone with self-employment income, even if the person holds a salaried job and is in a company pension plan. Most independent work qualifies for instance, owning a store, serving as a company director, management consulting, freelance writing, etc. The simplest test of eligibility: If you file a Schedule C (self-employment income) with your personal tax return, you're eligible to establish a qualified plan. In most cases, if you file a corporate or partnership tax return, re-turn, you also are eligible for a qualified plan. However it is always al-ways best to check with your own tax adviser to make sure. There are two broad types of qualified retirement plans to choose between defined-contribution defined-contribution and defined-benefit. Defined-benefit. If you are relatively young with a number of years until your retirement, a defined-contribution plan is probably the right choice for your business. The amount you can put into your account each year is based on a percentage of compensation subject to a ceiling. Within the defined-contribution category are two kinds of plans profit-sharing and money-purchase. money-purchase. You may choose either, or combine them. With profit- sharing, you may contribute up to 15 percent of your net income, with no obligation to make a contribu tion each year. That's helpful if you have a year of low earnings. With money-purchase, you select the percentage of income up to 25 percent per-cent you want to contribute, but then you must deposit that same percentage into your account each year no matter how low your income. in-come. If you want both the flexibility of profit-sharing and the higher contribution con-tribution ceiling of money-purchase, money-purchase, adopt a combination plan. (However, be aware that more paperwork is required for a combined plan.) Typically, you'd elect to put 10 percent of your income in-come into the money-purchase plan each year, and make that contribution con-tribution first, since it's mandatory. manda-tory. You'd then fund a profit-sharing profit-sharing plan to get you to the total of 25 percent of earned income-$30,000 income-$30,000 limit. Defined-benefit. if you are closer clos-er to retirement and would like to shelter a great deal of current income in-come while quickly building a substantial sub-stantial nest egg, you should probably prob-ably choose a defined-benefit plan. The size of your contributions will vary, but the yearly benefit at retirement re-tirement is fixed. Defined-benefit plans can be more complicated than defined-contribution defined-contribution plans. An actuary must calculate what you put in each year, based on your age, compensation, com-pensation, assumptions about the rate of return and other factors. Your deposit is recalculated annually so if your investment return re-turn is more than expected, next year's deposit will be smaller and vice-versa. To determine the plan or combination com-bination of plans best for you, work closely with your tax adviser and financial consultant. You may well decide to set up ypur plan with a full-service brokerage firm, which can handle all three essential elements ele-ments of a qualified plan. |