Investments PENSION PENNIES

What you need to know about do-it-yourself retirement plans.

It is beginning to look like there may not be any Social Security left by the time today’s young working class reaches the pasture. And even if there is, workers accustomed to taking home three grand a month who continue the same standard of living on Social Security will be able to live only three days each month. But there is hope for millions of Americans who are now eligible for self-help retirement programs: the big tax savings afforded by Individual Retirement Accounts and the Keogh Plan.

Here’s a rundown on the essentials of each plan, including the 1977 changes:

Individual Retirement Accounts (I.R.A.)

Now in its third year, this plan has been a big hit with tax savers since its inception. It’s available to individuals who are not actively participating in a qualified pension or profit sharing plan, a government employees plan, or a qualified annuity or bond purchase plan. The first year more than a million taxpayers set aside over a billion dollars for the good times in Sun City. Under the I.R.A. Plan, an individual can set aside a tax deductible contribution of the lesser of $ 1,500 or 15 percent of his taxable income each year for retirement. (The I.R.A. deducIt is beginning to look like there may not be any Social Security left by the time today’s young working class reaches the pasture. And even if there is, workers accustomed to taking home three grand a month who continue the same standard of living on Social Security will be able to live only three days each month. But there is hope for millions of Americans who are now eligible for self-help retirement programs: the big tax savings afforded by Individual Retirement Accounts and the Keogh Plan.

Here’s a rundown on the essentials of each plan, including the 1977 changes:

Individual Retirement Accounts (I.R.A.)

Now in its third year, this plan has been a big hit with tax savers since its inception. It’s available to individuals who are not actively participating in a qualified pension or profit sharing plan, a government employees plan, or a qualified annuity or bond purchase plan. The first year more than a million taxpayers set aside over a billion dollars for the good times in Sun City. Under the I.R.A. Plan, an individual can set aside a tax deductible contribution of the lesser of $ 1,500 or 15 percent of his taxable income each year for retirement. (The I.R.A. deduction is available to you whether or not you itemize your other deductions.) Not a big deal? Joe Crawley of First Federal Savings put a pencil to it and calculated | that a 30-year-old worker who sets aside $1 .500 a year in a 7 3/4 percent I.R.A. will Have accumulated $185,653.39 by the time he’s 60. This gives you an inkling of what compound interest can do for you when I.R.S. looks the other way. You’ve earned $140,653.39 in interest on a $45,000 capi-al contribution.

If you had paid taxes on the $1,500 annual contribution as you went along, your nest egg would have shrunk from ostrich to robin, to around $96,000 if you’re in the 25 percent tax bracket. If you are in the 36 percent bracket, you’ll be lucky to have $70,000 left. And if you are in the money brackets, don’t bother. The beauty of the I.R. A. Plan is that not only is the initial contribution tax free, but all the interest earned through the life of the account is also nontaxable. You will have to pay tax on what you take out of the account after you retire, but the rate will normally be much lower since your in-come will be less.

Here are the questions most often asked of I.R.S. and of the participating financiers about how I.R.A. works:

First things first: What can go wrong?

If you tap the account before you reach age 59 1/2, whatever you take out is taxable as ordinary income that year, plus a 10 percent penalty. If you over-contribute tion is available to you whether or not you itemize your other deductions.) Not a big deal? Joe Crawley of First Federal Savings put a pencil to it and calculated | that a 30-year-old worker who sets aside $1 .500 a year in a 7 3/4 percent I.R.A. will Have accumulated $185,653.39 by the time he’s 60. This gives you an inkling of what compound interest can do for you when I.R.S. looks the other way. You’ve earned $140,653.39 in interest on a $45,000 capi-al contribution.

If you had paid taxes on the $1,500 annual contribution as you went along, your nest egg would have shrunk from ostrich to robin, to around $96,000 if you’re in the 25 percent tax bracket. If you are in the 36 percent bracket, you’ll be lucky to have $70,000 left. And if you are in the money brackets, don’t bother. The beauty of the I.R. A. Plan is that not only is the initial contribution tax free, but all the interest earned through the life of the account is also nontaxable. You will have to pay tax on what you take out of the account after you retire, but the rate will normally be much lower since your in-come will be less.

Here are the questions most often asked of I.R.S. and of the participating financiers about how I.R.A. works:

First things first: What can go wrong?

If you tap the account before you reach age 59 1/2, whatever you take out is taxable as ordinary income that year, plus a 10 percent penalty. If you over-contribute to your account, you will have to pay a 6 percent excise tax for each year the excess contribution is left in the account.

Where should I set up my account to get the most for my money?

The 7 3/4 C.D. is an attractive vehicle, affording both a good rate of return and the desired low risk factor. Mutual funds qualify, but most of these involve commissions or service charges. And as we have seen in recent history, mutual funds can go down as well as up. Annuity contracts offered by insurance companies also qualify, but once again administrative costs must be considered, and a substantial loss of benefits may occur if for some reason you find it necessary to discontinue the program prematurely. Lastly, the U.S. Government offers a special qualifying retirement bond, but it pays only 6 percent.

I participated in my company’s retirement plan, but I quit my job on January 31, 1977. Can I set up an I.R.A. to cover the other II months?

No. If you actively participated in a qualified plan for even one day in 1977 you are not eligible for an I.R.A. On the other hand, if you had left the company to your account, you will have to pay a 6 percent excise tax for each year the excess contribution is left in the account.

Where should I set up my account to get the most for my money?

The 7 3/4 C.D. is an attractive vehicle, affording both a good rate of return and the desired low risk factor. Mutual funds qualify, but most of these involve commissions or service charges. And as we have seen in recent history, mutual funds can go down as well as up. Annuity contracts offered by insurance companies also qualify, but once again administrative costs must be considered, and a substantial loss of benefits may occur if for some reason you find it necessary to discontinue the program prematurely. Lastly, the U.S. Government offers a special qualifying retirement bond, but it pays only 6 percent.

I participated in my company’s retirement plan, but I quit my job on January 31, 1977. Can I set up an I.R.A. to cover the other II months?

No. If you actively participated in a qualified plan for even one day in 1977 you are not eligible for an I.R.A. On the other hand, if you had left the company in 1976 and had started to receive month-ly retirement checks then, and had continued to receive them all through 1977, you would still be eligible for an I.R.A. The key is whether you have actively participated in 1977, not whether or not you have received benefits from prior participation. And there’s another strange quirk. If you were a part of your company’s profit sharing plan, but the company made no contribution because it made no profit, you are still ineligible for I.R.A. because you were an active participant in a plan. But if in 1976 you recognized that you were part of a crummy plan and officially dropped out (if your company offers that option), you would be eligible for a ’77 I.R.A.

Since Texas is a community property state, half of my income belongs to my wife. Can I set aside $ 1,500 for me and another $ 1,500 for her even though she doesn’t work?

No. I.R.S. doesn’t recognize community property laws for I.R.A. purposes. But this year for the first time, I.R.S. does allow a token “housewives pension” of $250. So the two of you together can contribute a total of $ 1,750 this year. Strangely, in order to earn the maximum tax benefit, exactly one half of the $1,750 must be placed in a separate account for each of you, even though the bulk of the initial eligibility determination was based on the husband’s “personal” earning. If you and your spouse both work, and both are otherwise eligible for I.R.A., the two of you can deduct the lesser of $3,000 or 15 percent of your total earned income.

I might be able to scrape up $ 1,500 this in 1976 and had started to receive month-ly retirement checks then, and had continued to receive them all through 1977, you would still be eligible for an I.R.A. The key is whether you have actively participated in 1977, not whether or not you have received benefits from prior participation. And there’s another strange quirk. If you were a part of your company’s profit sharing plan, but the company made no contribution because it made no profit, you are still ineligible for I.R.A. because you were an active participant in a plan. But if in 1976 you recognized that you were part of a crummy plan and officially dropped out (if your company offers that option), you would be eligible for a ’77 I.R.A.

Since Texas is a community property state, half of my income belongs to my wife. Can I set aside $ 1,500 for me and another $ 1,500 for her even though she doesn’t work?

No. I.R.S. doesn’t recognize community property laws for I.R.A. purposes. But this year for the first time, I.R.S. does allow a token “housewives pension” of $250. So the two of you together can contribute a total of $ 1,750 this year. Strangely, in order to earn the maximum tax benefit, exactly one half of the $1,750 must be placed in a separate account for each of you, even though the bulk of the initial eligibility determination was based on the husband’s “personal” earning. If you and your spouse both work, and both are otherwise eligible for I.R.A., the two of you can deduct the lesser of $3,000 or 15 percent of your total earned income.

I might be able to scrape up $ 1,500 this year but I don’t know about 1978. If I sign up, am I committed to stay with it?

No. You can contribute any amount you like in future years (within the maximum) or none at all in lean years. And what’s more, once you reach age 59 1/2 you can take out the same way, as much or as little as you need, even none. When you reach age 70 1/2, you do have to start drawing down from your account a minimum amount based on your life expectancy.

I’m reading this in the dentist’s office. It’s February 1,1978.1 guess it’s too late for me to do anything about tax savings on my ’77 return.

Amazing, but it’s not too late. For the year but I don’t know about 1978. If I sign up, am I committed to stay with it?

No. You can contribute any amount you like in future years (within the maximum) or none at all in lean years. And what’s more, once you reach age 59 1/2 you can take out the same way, as much or as little as you need, even none. When you reach age 70 1/2, you do have to start drawing down from your account a minimum amount based on your life expectancy.

I’m reading this in the dentist’s office. It’s February 1,1978.1 guess it’s too late for me to do anything about tax savings on my ’77 return.

Amazing, but it’s not too late. For the first time I.R.A. contributions made with-in 45 days after the end of the taxable year may be deducted on the prior year’s return. In other words you can deduct I.R.A. contributions made on or before February 14, 1978 on your return for cal-|endar year 1977.

I took an early retirement from my com-pany and received a $50,000 lump sum distribution two weeks ago. Where do I stand as far as I.R.A. is concerned?

You stand to receive a fantastic tax benefit if you act quickly. You can deposit the entire $50,000 (if your employer contributed the whole amount) into an I.R.A., tax free, if you deposit it within 60 days from receipt. Internal Revenue calls this “roll-over.” You can leave it in your I.R.A. where it will be treated like normal I.R.A. funds, i.e., taxable when you take it out after retirement, or you can roll it out of I.R.A. into a pension account at your new place of employment, if your new employer agrees, without tax consequence. You have to roll first time I.R.A. contributions made with-in 45 days after the end of the taxable year may be deducted on the prior year’s return. In other words you can deduct I.R.A. contributions made on or before February 14, 1978 on your return for cal-|endar year 1977.

I took an early retirement from my com-pany and received a $50,000 lump sum distribution two weeks ago. Where do I stand as far as I.R.A. is concerned?

You stand to receive a fantastic tax benefit if you act quickly. You can deposit the entire $50,000 (if your employer contributed the whole amount) into an I.R.A., tax free, if you deposit it within 60 days from receipt. Internal Revenue calls this “roll-over.” You can leave it in your I.R.A. where it will be treated like normal I.R.A. funds, i.e., taxable when you take it out after retirement, or you can roll it out of I.R.A. into a pension account at your new place of employment, if your new employer agrees, without tax consequence. You have to roll over the full employer-contnbuted amount in the identical form received to qualify for roll-over benefits.

What happens to my account if I die before I reach age 59?

Feeling that you have suffered enough, Internal Revenue will not assess the 10 percent penalty if you die before you reach retirement age. The balance in the account must be paid to your beneficiaries within five years, or used to buy an annuity for the beneficiaries.

I established an l.R.A. mutual fund in 1975 and it’s going nowhere. May I switch to a different fund?

over the full employer-contnbuted amount in the identical form received to qualify for roll-over benefits.

What happens to my account if I die before I reach age 59?

Feeling that you have suffered enough, Internal Revenue will not assess the 10 percent penalty if you die before you reach retirement age. The balance in the account must be paid to your beneficiaries within five years, or used to buy an annuity for the beneficiaries.

I established an l.R.A. mutual fund in 1975 and it’s going nowhere. May I switch to a different fund?

Yes, if you reinvest the whole amount within 60 days. You can switch from any form of I.R. A. to any other, but only once ;very three years.

Can I deduct up to 15 percent of my taxable income regardless of the source?

No. The maximum contribution is based on a percentage of earned income, which means wages, salaries, professional fees, or other amounts for professional services actually rendered. I.R.A. is available to the self-employed as well as to the employed, though as we will see, the Keogh Plan is a better deal for self-employed professionals, under certain circumstances.

Keogh Plan

The Keogh Plan, named for the congressman who sponsored it, is much older than I.R. A., but similar in several respects, though it is available only to self-employed individuals. As with I.R. A., contributions are based on a percentage of personally Yes, if you reinvest the whole amount within 60 days. You can switch from any form of I.R. A. to any other, but only once ;very three years.

Can I deduct up to 15 percent of my taxable income regardless of the source?

No. The maximum contribution is based on a percentage of earned income, which means wages, salaries, professional fees, or other amounts for professional services actually rendered. I.R.A. is available to the self-employed as well as to the employed, though as we will see, the Keogh Plan is a better deal for self-employed professionals, under certain circumstances.

Keogh Plan

The Keogh Plan, named for the congressman who sponsored it, is much older than I.R. A., but similar in several respects, though it is available only to self-employed individuals. As with I.R. A., contributions are based on a percentage of personally earned income. Money withdrawn from the account before age 59 1/2 is subject to the 10 percent penalty. Withdrawals must commence by age 70 1/2. Excess contributions are subject to a 6 percent excise tax for each year they are left in the account. Death before the account matures has essentially the same tax consequences. (Caution Keoghers. Premature withdrawals subject you to the 10 percent penalty like I.R.A., but in Keogh it can also get you disqualified from the Plan for five years.) There are two major differences between Keogh and I.R.A. One is a distinct advantage but the other will require some financial soul-searching. Under Keogh, you can contribute the lesser of $7,500 or 15 percent of your earned income each year. So if your net earned income is 550,000, you can contribute $7,500 tax free, five times the I.R.A. maximum. But earned income. Money withdrawn from the account before age 59 1/2 is subject to the 10 percent penalty. Withdrawals must commence by age 70 1/2. Excess contributions are subject to a 6 percent excise tax for each year they are left in the account. Death before the account matures has essentially the same tax consequences. (Caution Keoghers. Premature withdrawals subject you to the 10 percent penalty like I.R.A., but in Keogh it can also get you disqualified from the Plan for five years.) There are two major differences between Keogh and I.R.A. One is a distinct advantage but the other will require some financial soul-searching. Under Keogh, you can contribute the lesser of $7,500 or 15 percent of your earned income each year. So if your net earned income is 550,000, you can contribute $7,500 tax free, five times the I.R.A. maximum. But if you have employees, you must contri-bute to an account for each employee an amount in the same percentage as your personal contribution. If you have only one or two employees, you might still come out ahead financially with a Keogh Plan. Let’s say you’re in the 50 percent tax bracket. A $7,500 Keogh contribution will save you $3,750 in taxes. If you have two employees, each earning $5,000 per year, you must contribute a like percentage to their accounts. If your $7,500 amounts to 15 percent of your personal net, you must contribute 15 percent of $5,000 to each employee, or a total of $1,500. You’re still $2,250 ahead for the taxable year, not to mention the $1,500 that you can deduct as a business expense or the goodwill in the minds of your employees. I.R.S. requires you to cover any employee with three years service who works more than 1,000 hours a year.

The Keogh regulations are much more complex than I.R.A., so don’t try it without expert advice based on your specific if you have employees, you must contri-bute to an account for each employee an amount in the same percentage as your personal contribution. If you have only one or two employees, you might still come out ahead financially with a Keogh Plan. Let’s say you’re in the 50 percent tax bracket. A $7,500 Keogh contribution will save you $3,750 in taxes. If you have two employees, each earning $5,000 per year, you must contribute a like percentage to their accounts. If your $7,500 amounts to 15 percent of your personal net, you must contribute 15 percent of $5,000 to each employee, or a total of $1,500. You’re still $2,250 ahead for the taxable year, not to mention the $1,500 that you can deduct as a business expense or the goodwill in the minds of your employees. I.R.S. requires you to cover any employee with three years service who works more than 1,000 hours a year.

The Keogh regulations are much more complex than I.R.A., so don’t try it without expert advice based on your specific situation. Here’s further guidance to assist you in determining whether or not you should pursue a Keogh account:

I won’t know what my earned income is until my accountant figures my return early next year. So how do I know how much I can contribute?

Keogh allows even more extra time for contributions than I.R.A. If you operate on a calendar year basis, any contribution that you make on or before April 15, 1978 on behalf of 1977 will be deductible on your ’77 return, if your Keogh Plan was already in effect before December 31, 1977.

What’s the deal on voluntary contributions?

If you have at least one employee, you can contribute the lesser of $2,500 or 10 percent of your earned income each year, over and above your regular contribution. This amount is not tax deductible, but the interest that it earns is tax free till situation. Here’s further guidance to assist you in determining whether or not you should pursue a Keogh account:

I won’t know what my earned income is until my accountant figures my return early next year. So how do I know how much I can contribute?

Keogh allows even more extra time for contributions than I.R.A. If you operate on a calendar year basis, any contribution that you make on or before April 15, 1978 on behalf of 1977 will be deductible on your ’77 return, if your Keogh Plan was already in effect before December 31, 1977.

What’s the deal on voluntary contributions?

If you have at least one employee, you can contribute the lesser of $2,500 or 10 percent of your earned income each year, over and above your regular contribution. This amount is not tax deductible, but the interest that it earns is tax free till retirement. You may withdraw your vol-untary contributions at any time you like without incurring a penalty.

I have a regular job with a retirement plan but I’m also an artist. I’ve sold three thousand dollars worth of paintings this year. May I contribute part of this extra income to a Keogh account?

Yes. you are entitled to a “moonlighters” pension.” Unlike having an I.R.A., being part of a company retirement plan doesn’t disqualify you if you have extra income from self-employed personal services. The amount of your Keogh contribution is. of course, based solely on your total self-employed income.

That’s great, but my net profit is only $2,000. Is it worth the effort, just to defer the tax on 300 bucks’.’

You’re entitled to still another benefit, an I.R.S. anomaly known as the “maximum minimum.” Since your self-employed adjusted gross income does not exceed retirement. You may withdraw your vol-untary contributions at any time you like without incurring a penalty.

I have a regular job with a retirement plan but I’m also an artist. I’ve sold three thousand dollars worth of paintings this year. May I contribute part of this extra income to a Keogh account?

Yes. you are entitled to a “moonlighters” pension.” Unlike having an I.R.A., being part of a company retirement plan doesn’t disqualify you if you have extra income from self-employed personal services. The amount of your Keogh contribution is. of course, based solely on your total self-employed income.

That’s great, but my net profit is only $2,000. Is it worth the effort, just to defer the tax on 300 bucks’.’

You’re entitled to still another benefit, an I.R.S. anomaly known as the “maximum minimum.” Since your self-employed adjusted gross income does not exceed $15,000. you are authorized to contribute the lesser of $750 or 100 percent of your earned income, in your case, $750.

I have a 25-percent interest in a four-man architectural partnership. We have no employees. Do I qualify for Keogh?

Yes. if your income is based upon personal services. A partner who personally contributes to the affairs of the partnership and who owns more than 10 percent capital or profit sharing interest is eligible. The plan must, however, be set up by the partnership though it doesn’t necessarily have to cover all the partners.

I’m a C.P.A. employed by an accounting firm hut I also own a small apartment building. Does my self-employment as owner of the apartment qualify me for Keogh?

Not unless you perform personal services in connection with the apartment, such as maintenance. An investment alone is not enough.

$15,000. you are authorized to contribute the lesser of $750 or 100 percent of your earned income, in your case, $750.

I have a 25-percent interest in a four-man architectural partnership. We have no employees. Do I qualify for Keogh?

Yes. if your income is based upon personal services. A partner who personally contributes to the affairs of the partnership and who owns more than 10 percent capital or profit sharing interest is eligible. The plan must, however, be set up by the partnership though it doesn’t necessarily have to cover all the partners.

I’m a C.P.A. employed by an accounting firm hut I also own a small apartment building. Does my self-employment as owner of the apartment qualify me for Keogh?

Not unless you perform personal services in connection with the apartment, such as maintenance. An investment alone is not enough.

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