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Don't Get Caught in Common "Abusive Life Insurance" Hot Spots "

Copyright 2011
All rights reserved
Retirement plans for self-employed workers

By Lance Wallach

Self-employed workers have the same retirement needs as anyone else, and maybe they have more money to invest and
deduct. The problem is that they don’t have a beneficent employer who offers carrots in the form of retirement benefits so
they have to grow their own. Below are a few ideas.
A SIMPLE IRA is just that – simple. The name is an acronym for Savings Incentive Match Plan for Employees.
SIMPLE IRA plans are designed for small businesses with no more than 100 employees who earned $5,000 or more on
the payroll for the previous calendar year, but some advisers and tax professionals think these plans are more suited for
much smaller companies. They typically recommend them for employers that have seven or less employees and for
someone who is not making a lot of money, and who consequently don’t have a lot to put into retirement. Even those
advisors agree, however, that they are easy and simple. Including instructions, the account application is about four pages
to fill out, and you can probably do it in 10 minutes.
Q & A
·        Who can open one? Generally an employer with no more than 100 employees.
·        Cost and complexity? Low.
·        Employer contribution limit? Three percent of employees' pay, matching, or two percent nonelective.
·        Employee contribution limit? $11,500 for 2009.
·        Annual reporting requirements? None.

A SEP IRA, or Simplified Employee Pension plan, is as easy and low cost to set up and maintain as the SIMPLE IRA. But
instead of the employee making contributions to the plan with a match from the employer, the employer makes the entire
Self-employed workers may find the SEP ideal due to its low setup and maintenance costs. Business owners can save
quite a bit more in a SEP than the SIMPLE or other IRAs. For 2009, the contribution limit is 25 percent of net income up to
Q & A
·        Who can open one? Any employer or self-employed person.
·        Cost and complexity? Low.
·        Employer contribution limit? 25 percent of employees' net income up to $49,000.
·        Employee contribution limit? Not applicable.
·        Annual reporting requirements? None.
Solo 401(k)
Similar to a 401(k), a Solo 401(k) lets small-business owners share the fun and benefits in a slightly different way. The
business must be very small, limited to the owners of the business and their spouses.
The Solo 401(k) allows business owners to put away more money than a SIMPLE or SEP IRA, and there is some flexibility
when it comes to contributions. You can contribute more or less every year, but a maximum of $16,500 for 2009, and a
profit sharing component can also be added to the Solo-K.
Business owners can add the profit sharing part to maximize contributions to the plan. The employer can make a maximum
tax-deductible contribution to the plan of up to 25 percent of compensation.
Q & A
·        Who can open one? Self-employed business owners with no employees other than a spouse.
·        Cost and complexity? Medium.
·        Employer contribution limit? $16,500 of salary deferral plus 25 percent of compensation, or $49,000, whichever is
less, if a profit sharing component is added to the plan.
·        Employee contribution limit? Not applicable.
·        Annual reporting requirements? Yes.
Defined benefit plan
The most expensive and complicated retirement plan for the self-employed, the defined benefit plan is most appropriate
for someone looking for a large tax deduction.
Employers can save a maximum of $195,000 per year. But you usually need an actuary to determine the amount that can
be contributed.
It is worth noting that the defined benefit plan will give you your largest contributions, but it comes with strings attached.
For instance, you have to have a plan document and probably with an actuary. It will be the most expensive to do and will
usually require you to make a contribution every year.
In contrast, the Solo-K, SEP and SIMPLE IRAs allow more flexibility by allowing employers to reduce contributions in a year
with poor cash flow.
Defined Benefit plans can still be a good option for business owners who want to save the most money on a tax-deferred
basis as possible.
You need to be careful with most retirement plans. The IRS is cracking down on many plans sold by insurance agents and
stockbrokers that have life insurance in them. If they call your retirement plan a listed, or similar transaction you will have
big problems. Not only will the IRS disallow your deductions and charge you interest and penalties, but you will also be
fined for not telling on yourself.

Lance Wallach, National Society of Accountants Speaker of the Year and member of the AICPA faculty of teaching
professionals, is a frequent speaker on retirement plans, financial and estate planning, and abusive tax shelters.  He
writes about 412(i), 419, and captive insurance plans. He speaks at more than ten conventions annually, writes for more
than 20  publications, is quoted regularly in the press and has been featured on television and radio financial talk shows
including NBC, National Pubic Radio's All Things Considered, and others. Lance has written numerous books including
Protecting Clients from Fraud, Incompetence and Scams published by John Wiley and Sons, Bisk Education's CPA's Guide
to Life Insurance and Federal Estate and Gift Taxation, as well as AICPA best-selling books, including Avoiding Circular
230 Malpractice Traps and Common Abusive Small Business Hot Spots. He does expert witness testimony and his side
has never lost a case. Contact him at 516.938.5007,, or visit or www.

The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific
individual or other entity. You should contact an appropriate professional for any such advice.
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