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Big benefit of being 50 and self-employed? Savings options

Options include a pension plan in which as much as 20% of your net business profit or 25% of your salary (if you pay yourself with a W-2) can be contributed to a maximum of $49,000 in 2011.

April 03, 2011|Liz Weston | Money Talk

Dear Liz: I'm 50 and self-employed. I am trying to save as much as possible for retirement. I've put the maximum allowable in my IRA ($6,000). What else can I do? Would contributing to a Roth at this age be advisable? What other options are out there?

Answer: You're lucky — you actually have more options to save for retirement than people who don't own their businesses, if you can spare the cash to make significant contributions.

You can contribute up to $14,000 annually to a SIMPLE IRA (the limit is $11,500 for people under 50). Another option is a simplified employee pension, or SEP. You can contribute as much as 20% of your net business profit or 25% of your salary (if you pay yourself with a W-2) to a maximum of $49,000 in 2011. For more details on SIMPLEs and SEPs, see IRS Publication 590.

If you want to contribute more than the SIMPLE's $14,000 limit but a SEP won't allow you to put aside enough, you can contribute a greater percentage of your income to a solo 401(k) or a solo Roth 401(k). With these plans, you can contribute 100% of your first $22,000 in income from the business (or $16,500 if you're under 50), plus 20% of net profit, until you hit the $54,400 maximum for those 50 and older ($49,000 is the maximum for younger people). Your contribution to a solo 401(k) would be tax deductible, while your contribution to a Roth 401(k) would not be, but your withdrawals in retirement would be tax free.

If you're really taking in the dough, consider a traditional, defined-benefit pension plan. These plans can cost thousands of dollars to set up and administer, but you can put aside hundreds of thousands of dollars a year.

You can take advantage of any of these options and contribute an additional $6,000 to a Roth IRA. (You can't, however, contribute $6,000 each to both a traditional IRA and a Roth IRA; the limit for both accounts combined is $6,000.) Having at least some money in a tax-free retirement bucket can give you more flexibility to control your tax bill in retirement.

You'll probably want a tax professional's advice, since retirement can be a complex area to navigate.

Goodwill? Don't bank on it

Dear Liz: I opened a free checking account at a bank that has since been bought out by another. Recently the new owners started charging a $10 monthly service fee. How are they allowed to do this? Aren't accounts "grandfathered"? Or is that up to the bank? In today's economy with unemployment so high and more and more people, like me, living below the poverty level, this seems a step backward for any bank. With the recent bank bailouts and the bad reputation banks have, it would seem that "goodwill" would matter at least a little. When I asked the teller to justify the change she replied, "This is a huge bank. We don't have to justify anything we do."

Answer: Your teller gave you your answer. Goodwill doesn't count for much when banks are trying to maximize revenue.

And there's certainly no law requiring the new owner to honor the old bank's promises. The new owners can charge new fees, alter policies and change interest rates on savings accounts and certificates of deposit.

Checking account fees are making a big comeback lately. Banks are claiming these new fees are necessary because regulators restricted one of their big sources of income: bounce fees. Starting last summer, banks were required to get customers' permission before signing them up for "courtesy overdraft" services that allowed the banks to charge $35 or so each for over-limit transactions. When finally given the choice, many of those customers declined to opt in to the expensive programs and bounce fee income plummeted.

So banks are experimenting with other fees, but you still have options. Often the fees are waived if you maintain a minimum account balance, for example. In your case, that might be tough, so you might want to consider moving your accounts to another bank or a credit union. Credit unions are member-owned financial institutions, and many still offer free checking or have lower fees for low-balance accounts. To see which credit unions you might join, visit http://www.findacreditunion.com.

Liz Weston is the author of the book "The 10 Commandments of Money: Survive and Thrive in the New Economy." Questions for possible inclusion in her column may be sent to 3940 Laurel Canyon, No. 238, Studio City, CA 91604 or via asklizweston.com. Distributed by No More Red Inc.

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