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Retirement planning

In the last issue of Land Line we talked about how retirement savings accumulate over the years. But which retirement plan is best for you to maximize your annual contributions? There are many possibilities. This is the time of year to refresh your memory and possibly make decisions about the type of plan you want to choose.

The most popular form of retirement plan and the most commonly known is the Individual Retirement Account (IRA). Most taxpayers are not sure whether they should make a contribution to an IRA that is deductible and pay the taxes when a distribution is made, or make a nondeductible contribution to a Roth IRA and be able to take distributions that are not taxable. It is our feeling that if you are in a 15 percent tax bracket, it would make sense to put the money in a Roth IRA where you can compound the earnings and get the money out tax free. If you are in a higher tax bracket, you may need to do further analysis before deciding on a regular or Roth IRA. Your age is also a determining factor. If you are going to be in an IRA well over five years, it is probably more beneficial to put the money in a Roth IRA, providing you are investing in stocks or mutual funds. The nontaxable feature of the Roth distributions in combination with annual contributions and relatively high annual earnings over time will be most beneficial. If you are older and are going to qualify for a distribution in a few years and you are in a higher tax bracket, it may be beneficial for you to put the money in a regular deductible IRA. The maximum annual IRA contribution that has been set at $2,000 for the past 20 years, is raised as follows: for 2002 to 2004 – $3,000; for 2005 to 2007 – $4,000; and for 2008 – $5,000.

Note: The 2001 Tax Cut Act provides a tax credit to low-income individuals for certain retirement savings contributions. The maximum credit is 50 percent of the individual’s retirement savings contributions that do not exceed $2,000. The credit is allowed for contributions made to an IRA.

Another plan that gives you an even greater deduction is the Simplified Employee Pension (SEP) IRA retirement plan. This plan allows you to put away up to 15 percent of your net earned business income. The beauty of this plan is it can be opened as late as April 15 for the prior tax year or as late as the due date of any extensions filed.

An even greater deduction can be had through Keogh plans. These are retirement plans for the self-employed. It allows you to put away up to 10 percent of your net business income for pension purposes and 15 percent of your net business income for profit sharing plan purposes or a combined 25 percent deduction. Caution: Keogh plans must be opened prior to the beginning of the year following the previous deduction year. For example, if you wish to get the Keogh retirement plan deductions for the year 2001, you must open up the Keogh plans prior to Jan. 1, 2002. The plans can be opened with no money down or with as little as $5 in each plan.

Many people ask us where they should open their retirement plans. Our feeling is that retirement plans should be opened at a stock brokerage house, which would enable you to invest the money in stock equities, treasury bonds or mutual funds. Everybody knows that investing in stocks carries a greater risk than investing in cash, however, stocks will protect you against inflation and over the long haul should do much better than a cash investment. After all, you need the money to grow so you can reach your retirement goal. Remember, the higher the potential return, the greater the risk, however, there are no guarantees. Before investing, it is a good idea to talk with a money manager.

There is a relatively new plan called the Savings Incentive Match Plan for Employees (SIMPLE) plan, which in most cases must be opened by Oct. 1 in the year you are claiming a deduction. It’s too late this year unless you are new in business. The SIMPLE plan will allow you to put away dollar for dollar of business earned income up to $6,000.

Caution: Under the SEP IRA, Keogh and Simple plans, you are required to cover employees if they qualify.

This article has been presented by PBS Tax & Bookkeeping Service, a company that has been providing income tax and bookkeeping services to the trucking industry for more than a quarter century. Contributions to this article were made by Shasta May, Director of Business Development for PBS. If you would like further information, please contact us at 1-800-697-5153 or visit our web site at

“Everyone’s financial situation is different. This article does not give and is not intended to give specific accounting and/or tax advice. Please consult with your own tax or accounting professional.”