Financial Literacy 2007 - Retirement
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retirement
Basic elements of IRAs and workplace plans

Plans for Small Business Employees and the Self-Employed

SEP IRA
How they work: Contributions are made by the employer with pre-tax dollars and earnings grow tax-deferred. You pay income taxes upon withdrawal on original contributions and earnings.

Contribution limits: For 2007, up to 25% of compensation, but no more than $45,000.

Income eligibility requirements: Employees who earn less than $500 maybe excluded. However, if you open a plan for yourself, you must offer the plan to all other eligible employees who've worked for any amount of time in three out of the last five years.

Warnings: You'll owe a 10 percent penalty if funds are withdrawn before you're age 59½. Likewise, minimum required distributions have to be made by age 70½.

Who they're for: Small businesses, including self-employed individuals, sole proprietors or partnerships. Because workers don't have to receive SEP contributions from their employer until they meet the three-year service requirement, the plans are great for small businesses who want to offer a retirement plan on a more effective basis, says Lesser.

Simple IRA
How they work: Contributions are made with pre-tax dollars, plus employers match savings in one of three ways. They can fund up to 3 percent of earnings every year. In certain years they can chip in between 1 and 3 percent of earnings. Or they can make non-elective contributions (that is, give money to an employee's plan even if that worker doesn't save) that are equal to 2 percent of a worker's compensation. Contributions and earnings grow tax-deferred until withdrawn, at which point they're subject to income taxes.

Contribution limits: Individuals can save up to $10,500 and those who reach age 50 by the end of 2007 can save an additional $2,500.

Warnings: You'll generally pay a 10 percent penalty if funds are withdrawn prior to age 59½ and you must start cashing out by age 70½ or you'll pay a 50 percent penalty on the required minimum distribution

Who they're for: Self-employed individuals or small businesses with no more than 100 employees who earned more than $5000 in the preceding calendar year. Plans are ideal for self-employed business owners, including individuals, who want a flexible plan because contribution methods can be selected before the start of each year.

Solo 401(k)
How they work: Contributions are made by sole proprietors with pre-tax dollars and earnings grow tax-deferred. Income taxes on earnings and original contributions are paid when withdrawn.

Contribution limits: Up to $15,500 in 2007 plus an additional $5,000 for those who reach age 50 by the end of the year, plus an additional 25% of total compensation, up to $45,000 in 2007.

Income eligibility requirements: None.

Warnings: Those who withdraw funds before age 50½ will generally owe a 10 percent penalty. You'll also pay a penalty if you fail to take a required minimum distribution by age 70½.

Who they're for: Because it has far higher contribution limits than an IRA, the solo 401(k) is good for self-employed individuals with no employees who want to contribute a significant amount of money to a retirement plan.

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