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CHAPTER 14

contribution. Just because they may not match now, doesn’t mean they won’t match in the future.

All employer-sponsored retirement plans have the same tax treat- ment. Gains and interest accrue on a tax-deferred basis, and there are no taxes due until the participant begins to take distributions. At that time, the participant will face ordinary income tax on the portion withdrawn. However, there will be a 10-percent early-withdrawal penalty imposed for those people who are younger than 591/2.3

SMALL BUSINESSES AND SELF-EMPLOYED PEOPLE

Investing in a 401(k) or 403(b) may sound like a great idea, and if you have access to one at work, it is a tremendous way to increase your retirement nest egg. However, 401(k)s also pose a large cost to the employers who offer them. Because of that, many smaller businesses can’t afford to establish 401(k)s at work for their employees. But that doesn’t mean that the employees don’t have any kind of retirement account to use. There are a few different types of plans that smaller businesses and self-employed workers can use that will offer them the same type of preferred tax treatment, as well as the encouragement to save money for retirement. We’re talking about the SEP, SIMPLE, and Keogh plans. These plans are self-directed because they allow the employee, or self-employed worker, to choose exactly what the con- tributions are being invested in. While the employer who established the SEP and SIMPLE will choose the institution at which the plan is started, the employee will have the final say over which available investments will be used for all contributions. Depending upon where the plans are established, the employees could have quite a range of available choices.

SEP Plans Employers may establish SEP (simplified employee pension) plans for their employees using either individual retirement arrangements (IRAs) or annuities that are individually owned by each employee.

3 There are certain exceptions for this rule, notably the SEPP exception, which is discussed in a subsequent section.

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