RETIREMENT PLAN COMPARISON

TYPE OF

RETIREMENT PLAN

PLAN CONTRIBUTION

FEATURES AND LIMITS

Plans For Individuals

Individual Retirement Account (IRA)

The lesser of $2,000 or 100% of earned income. $4,000 for an individual and spouse. The tax deduction is phased out if either spouse is in an employer plan and income exceeds certain limits: $50,000+ joint, $30,000+ single, subject to future annual indexing. Non-deductible IRA contributions are permitted, but not attractive.

Roth IRA

This is a non-deductible IRA, that is limited to $2,000 per year, or the employee’s earnings, if less. Contributions may continue after age 70. Withdrawals are tax-free and need not be made.

Tax Sheltered 403(b)(7) Annuity or Custodial Account

Salary reduction arrangement up to the lesser of 25% of compensation, an amount calculated under special rules or $9,500. Non-deductible contributions not permitted. Funds may be invested in an annuity or in a mutual fund custodial account.

Plans for Smaller Businesses

Simplified Employee Pension (SEP)

The lesser of 15% of earned income up to $160,000, producing a maximum contribution of $24,000.

Salary Reduction (SARSEP)

Salary reduction arrangement up to the lesser of $10,000 (1998 limit). Regulations may require a business contribution in "top-heavy" plans. New SARSEP plans cannot be created.

Profit Sharing Plan

The lesser of 15% of earned income or $24,000 for each individual. Contributions may vary based on profits. The Thrift Plan version permits employee contributions.

Money Purchase Pension

The lesser of 25% of earned income or $30,000. Annual contribution is generally required once installed.

Plans for Mid-Sized Businesses

Profit Sharing

The lesser of 15% of earned income or $24,000 for each individual.

Money Purchase Pension

The lesser of 25% of earned income or $30,000. Annual contribution.

401(k) Plan

The lesser of 15% of earned income or $24,000. There is a $10,000 cap on elective deferrals. (1998 limit.)

Defined Benefit Pension

Costs are normally borne by the Employer, but some plans require the employee to make non-deductible contributions, generally as a per cent of compensation.

Special Plan for Governments

Sec. 457 Deferred Compensation

Employees may contribute up to 33% of earned income, subject to a maximum of $8,000. (1998 limit.)

 

SELECTING THE MOST APPROPRIATE PLAN

PLAN

IDEAL INVESTOR

SPECIAL FEATURES

IRA

Every wage earner who wishes to save for retirement with dollars that can grow tax-deferred. Ideal plan for individuals interested in planning ahead for a secure future.

  • Contributions can grow tax-deferred.

  • Many contributions may still be deductible.

  • Personal control of investment media and retirement date.

  • Non-deductible contributions require long term recordkeeping.

ROTH IRA

A wage earner with family income within the Roth IRA AGI limit: $150,000+ joint

$95,000+ single filers.

  • Contributions can grow tax-deferred forever.

  • Owner can determine and change the investments.

  • Income (after 5 years) may be taken tax-free.

  • Income withdrawal can be postponed forever.

TSA

School teachers, employees of universities, colleges, hospitals, churches and other non-profit organizations wishing to reduce their personal taxes and save for retirement with tax-deferred dollars.

  • Available only to select group of individuals.

  • Can usually contribute more than an IRA allows.

  • Loan provisions are still available.

  • Can invest in annuities or mutual funds.

SEP

Small firm seeking to minimize filings and paperwork. One short form sets it up and investments are made to an IRA. May exclude employees with less than 3 of previous 5 years of service and those under 21.

  • Easy to establish.

  • No government filings.

  • Extended deadline for plan set up.

  • Full flexibility of contributions.

  • 100% usually vested immediately.

SARSEP

Business with 25 or fewer employees wanting to offer employees a way to invest through convenient salary reduction in before-tax dollars. Limit contribution by the business. Special non-discrimination test. May exclude employees with less than 3 of previous 5 years of service and those under 21.

  • Simple, inexpensive "401(k)".

  • IRA replacement.

  • Promote employee participation.

  • 100% usually vested immediately.

  • Special non-discrimination test.

  • New SARSEP cannot be established.

Profit Sharing

A firm where cash flow and income are somewhat variable. Ideal plan for firm wanting a flexible contribution with a maximum of 15%. May exclude employees under age 21 and those with less than 2 years of service.

  • Full flexibility of contributions.

  • Part-time employees may be excluded.

  • Vesting schedule may be used.

  • Full reporting.

  • Integration available.

  • Employee contribution is permitted.

Money Purchase

A firm with substantial income. Ideal for a firm wanting to maximize contributions at a fixed percentage. May exclude employees under age 21 and those with less than 2 years of service.

  • Maximizes deductible contributions.

  • Part-time employees may be excluded.

  • Vesting schedule may be used.

  • Full reporting.

  • Integration available.

401(k) Plan

Larger firm where the majority of employees defer a portion of their salary. Ideal for business desiring to contribute on a match basis. Special non-discrimination tests for deferrals. May exclude employees under 21 and those with less than 1 year of service.

  • Consulting and plan design.

  • Comprehensive record keeping.

  • Competitive fees.

  • Employee communications package.

  • Vesting schedule may be used for the employer contribution.

Sec. 457 Plan

Installed and administered by the government agency that can limit choices.

  • Administration of payroll adjustments.

  • Individual enrollment

and investments by the employee.

 

THE NEWEST DEVELOPMENT - THE ROTH IRA

With the 1997 Taxpayer Relief Act, Congress created the newest option - the ‘Roth IRA.’ This offers significant opportunities for some. One form is a rollover from a traditional IRA. The amount is taxable now, subject to a four year bracket. But, to achieve the best result a taxpayer could roll over the entire sum - and pay the tax from other funds.

The other Roth IRA format is to make a contribution of up to $2,000 per year - on a non-deductible basis.

The major advantage of the Roth IRA is that the income will be tax-free when withdrawn. For some, the later tax savings are justification for the higher tax payment now.

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