Retirement plan basics for self employed

A: Many self-employed people have thought about starting a retirement savings account but put it off because they simple do not know where to start or where to go to get good unbiased information. OnlineAdviser service supports a number of online resources designed to make it easy to find independent reliable information about planning, taxes, paperwork and investments related to retirement plans. Here are a few basic points about retirement plans to help get started: 1. Everyone is eligible to participate is some type of retirement plan. Every person with earned income can establish a “qualified” retirement plan (this term is explained below). Spouses without earned income are also eligible for a qualified retirement plan. 2. Any type of retirement account can be established within one business day. Most types of individual and small business retirement plans are very easy to start cost practically nothing to start. Financial firms typically charge a $10 per person annual fee to handle the required tax paperwork. A few types of business retirement plans like pensions and 401(k) plans cost at least a few hundred dollars and may require some significant paperwork. 3. Some retirement plans like pension plans, 401(k)s are set up and managed by an employer (like a pension plan) and other types are controlled directly by an individual (like Individual Retirement Accounts and Simplified Employee Pensions). 4. There is a tax penalty for taking money out of a tax-qualified retirement plan before retirement age but this rule has many exceptions. Money can be taken out without penalty to supplement normal monthly income, buy a house, or pay educational or medical expenses. In any event, the amount of the tax savings for participating in the retirement plan usually outweighs the early withdrawal tax penalty. 5. Most retirement plans are called “tax-qualified”. “Tax-qualified” with regard to a retirement plan means that the amount contributed is not considered taxable income now, that earnings accumulate without taxes and the income is taxed as it is taken out, usually after age 59. 6. A less common type of retirement plan is called “non-qualified”. This type has no tax penalties and generally uses more liberal benefit provisions. Successful business owners and high income individuals usually find it necessary to combine both qualified and non-qualified retirement plans to maximize their benefits. 7. The most common types of tax-qualified retirement plans are Individual Retirement Accounts (IRA), 401(k) plans, 4013(b) plans, and Simple Employee Pension plans. There are about a dozen other types of retirement plans that are less common but are used for specific situations. 8. The most common types of non-qualified retirement plans are deferred compensation plans and stock incentive (or stock option) plans. 9. There is usually no minimum deposit to start a retirement savings account and many people elect automatic periodic transfers from their payroll or checking account into a retirement savings account. 10. A worker who directs 5% of his/her earnings every year into any retirement account over an entire working career will almost certainly enjoy financial security by normal retirement age. Few of us actually do this, so most of us wind up trying to play “catch up” later in our working careers. 11. OnlineAdviser service answers questions about retirement plans free of charge and helps individuals and small businesses set up free or low cost retirement plans using many online resources. OnlineAdviser is an independent and unaffiliated Registered Investment Adviser that uses no-load or commissioned investment products to keep investor costs to a minimum. Look for Web sites displaying the “OnlineAdviser” logo or contact Tony Novak directly at www.asktony.tonynovak.com .