Originally created 07/05/99

IRA geared for self-employed

Becoming self-employed means saying goodbye to the things you hate about corporate America: oppressive managers, back-stabbing co-workers and pesky human resources personnel.

On the other hand, it means saying goodbye to employee benefits like pensions, profit-sharing programs, 401(k)s and other company-sponsored goodies.

Augusta couple Dan and Bonnie Keough found that out after quitting their day jobs several years ago to start their own bathroom refinishing business, Bathcrest of Augusta.

Dan, 46, a former supervisor at the U.S. Battery plant in Columbia County, left the company upon realizing his personality was better suited for entrepreneurship, not a job in mid-level management.

"I didn't delegate very well," he recalled. "I did things myself to make sure they were done right."

So he and Bonnie, 36, a licensed dental hygienist, decided to buy into the Salt Lake City-based Bathcrest franchise as a way to have more freedom and better long-term financial security.

"It's hard to know where you stand working for someone else these days -- it seems like somebody's getting laid off everyday," she says.

The couple was soon doing several contract jobs a week, hauling their spray-on synthetic porcelain to bathrooms around the city. Most calls were from contractors whose workers had scratched or chipped a tub during construction and from homeowners who wanted to make their harvest gold and avocado green tubs white.

They were happy with their new source of income, but it wasn't providing them with the retirement plan they had once known. Anyway, most of their earnings were being reinvested into the business, which had a sizable start-up cost.

Their scenario was not uncommon for self-employed entrepreneurs, said Sharon DeVaney, a Purdue University family economics professor and author of a recent study on the retirement planning activities of the self-employed.

"Self-employed people are so enthusiastic about what they are doing and so busy that they don't look out for themselves," she said.

With three children, and Mr. Keough less than 20 years from retirement age, the couple realized they needed to get serious about investing for their future.

They contacted Will Rogers, a senior financial adviser with American Express Financial Advisors, who helped them open a Simplified Employee Pension IRA, commonly known as an SEP-IRA.

SEP-IRAs, like most other qualified plans, are tax-sheltered accounts where savings can grow into a sizable nest egg if left untouched until retirement age.

The SEP-IRA is specifically designed for sole proprietors and small business owners with few employees who do not maintain or contribute to any other retirement plan. In this respect it is similar to the Savings Incentive Match Plan IRA, also known as a SIMPLE-IRA.

Tax law changes in 1997 phased out another form of plan known as the Salary Reduction Simplified Employee Pension IRA (SARSEP-IRA). Essentially it had the same benefits as the SEP-IRA and SIMPLE-IRA but was much more difficult to administer.

Both SEP-IRA and SIMPLE-IRA are attractive to small business owners desiring a simple and low-cost plan that can be extended to potential employees as well, Mr. Rogers said.

"Most folks don't want to be limited," he said. "They want to be able to have employees."

For now, the Keoughs can handle the business just fine on their own.

But someday they may turn the business over to any of their three children, now ages 6, 8 and 15, if they became interested.

Or, they said they may find an employee interested in gradually taking ownership of the company when they reach retirement age.

"I figure I've got at least 20 years left in me," Mr. Keough said.

Mr. Rogers advises the Keoughs, and most other small business owners, to treat IRAs -- not business assets -- as the primary source of retirement income.

That's because small business owners discover their business isn't worth as much as they may think, he said.

The problem is that most small businesses, even extremely successful ones, have no operating system in place and can't function independently of the owner, making them unattractive investments to buyers wanting a seamless takeover.

"If the business is one that falls apart if you're gone for the day, who would want to buy it?" Mr. Rogers said. "The question I ask clients is, `If you died today, how much is your wife going to get for the business?' The answer is the figure we plan around."


Self-employed persons and small business owners start pension plans to attract and retain quality employees while increasing their own tax-sheltered retirement contributions.

"With a regular IRA, you're unfortunately limited to $2,000 a year," Jake Marshall, a retirement specialist for Fidelity Investments in Atlanta points out. "With a Keogh plan you can go as high as $30,000."

IRA facts

Here's a breakdown of the contribution/deduction limits for the most commonly used plans, keeping in mind that incorporated companies fund plans with earned income while unincorporated businesses use adjusted earned income:

SIMPLE-IRA: Employers can deduct 3 percent of eligible payroll. Employees can contribute 3 percent of compensation up to $6,000, plus $6,000 salary deferral limit for a total of $12,000. Vesting is immediate.

SEP-IRA: Employers can deduct 15 percent of eligible payroll. Employees can contribute 15 percent of compensation up to $24,000. Vesting is immediate.

Keogh (profit sharing): Employers can deduct 15 percent of eligible payroll. Employees can contribute 25 percent of compensation up to $30,000. Vesting schedules may apply.

Keogh (money purchase pension): Employers can deduct 25 percent of eligible payroll. Employees can contribute 25 percent of compensation up to $30,000. Vesting schedule may apply.

Source: Staff research

Damon Cline covers business for The Augusta Chronicle. He can be reached at (706) 823-3486.


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