Posted by Gene Fairbrother (NASE Lead Small Business Advisor) - When people think about retirement planning the first challenge they face is trying to understand all the government-eeze written in the Internal Revenue publications. Like a foreign language, all those rules and regulations don't make it easy for middle income America to take advantage of building for their retirement years. In reality, what most people need to understand are a few basics and leave the rest to the financial pros from Dover.
There are two primary issues to consider in retirement plans with the first being what type of plan is best for you. The choices depend on whether you are an employee of a business or you run your own show. Of course, if you are an employee and participate in an employer plan your choices can often be limited. But, if you OWN the company you need to search your options to find the best and most tax advantageous retirement plan.
As an entrepreneur your basic choices include an IRA, KEOGH, SEP, ROTH, 401(k), or a SIMPLE. Then, under each of these categories there are sub-categories. Like under the SIMPLE there is the option of an IRA-SIMPLE or a 401(k)-SIMPLE. These are the specific types of plans for which the Congress has established tax rules on how much a person can contribute annually, who qualifies to participate, what type of IRS reporting is required, and other rules. As an example - in an IRA just about anyone with earned income can contribute up to a specific dollar amount into a tax deferred retirement account. In an SEP, you can contribute up to twenty-five percent of your earnings. The limits for what you can contribute into any plan depends on the type of plan, your IRS defined earnings, your age, your marital status, and any changes in the annual limits. As those amounts can change every year, you have to check the IRS guidelines for just how much you can contribute to any specific plan.
The primary point in the above is that when you're talking about a type of plan (like an IRA or an SEP) you are talking about what set of IRS rules the plan has to follow.
The real world determination in deciding what type of plan you set-up ultimately comes down to a fairly simple factor - how much cold hard cash you have to contribute into a retirement plan for a particular year. If the maximum you can put into a retirement is a few thousand dollars, a traditional IRA or a ROTH is all you need. If you have the disposable income or business profits to contribute more, then an SEP, KEOGH, 401(k), or SIMPLE plan is going to be better.
The second aspect to any retirement planning is where to invest your money; mutual funds, treasury bills, stocks, certificates of deposits, or wherever. This decision is even more important than what type of plan you have because this will determine how much you end up with when you retire. This is really a pretty easy point to answer ... unless you have a great deal of knowledge and expertise in investing you need to use a professional to guide you.
Setting up a retirement plan and choosing where to put your money is not for the neophyte. Unless you have good investing savvy use a professional and talk to a good tax planner, financial planner, or investment broker.