What is a qualified retirement plan?
A qualified retirement plan is one that qualifies for special tax treatment under IRS Code Section 401. The contribution to a qualified plan is deductible for the employer and not taxed immediately to you. Instead, it will grow tax-deferred until you finally begin making withdrawals -- usually after age 59 1/2. And if you wait until then, you will get another tax break because the money will be taxed at your retirement rate, which will probably be lower than the rate you pay while still working. In short, you will get to keep more of the money you have earned and Uncle Sam will get less. Money in a nonqualified plan may also grow on a tax-deferred basis, but contributions are not deductible and thus will accumulate less cash for retirement.

What is the difference between a defined-benefit plan and a defined-contribution plan?
Most retirement programs offered by employers fall into one of two categories: Defined-benefit plans and defined-contribution plans. In a defined-benefit plan, the employer promises its workers that they will receive a specific benefit when they retire. Most traditional pension plans are defined-benefit programs: Employees are told exactly how much they’ll receive and when. In other words, those benefits are defined. In a defined-contribution plan, such as a 401(k), the company promises to make a specified contribution to each worker’s retirement fund. However, no promises are made about the exact amount the worker will ultimately receive at retirement. That amount will vary depending on the performance of the worker’s investments. Only the company’s contribution is defined.

What is a nonqualified deferred compensation plan?
A nonqualified deferred compensation plan is a contractual agreement between an employee and his or her employer. Under this contract, which is the plan document, the employer makes a promise to pay income benefits to the employee at some later date, subject to a number of requirements and other provisions of the document. The plan may be merely a promise on the part of the employer (an unfunded plan), or the promise may be secured by assets set aside in the employee’s name (a funded plan) and protected from the company’s creditors.

What is a salary reduction simplified pension plan (SARSEP) and how does it work?
A salary reduction simplified employee pension plan is sort of a cross between a simplified employee pension (SEP) plan and a 401(k) retirement plan. New SARSEPs may not be established after Dec 31, 1996. They’re found most often at small businesses. Unlike a traditional SEP, a SARSEP allows voluntary employee pre-tax contributions. The money employees contribute is usually taken right out of their paychecks, lowering their gross pay and thus reducing their annual taxes. Money in the SARSEP grows tax-deferred until withdrawals begin, usually after the employee retires and turns 59 1/2. SARSEPs are limited to businesses with no more than 25 workers, and at least half of the eligible employees must contribute on a salary reduction basis.

What are Supplemental Executive Retirement Plans?
A Supplemental Executive Retirement Plan, or SERP, is a special type of nonqualified retirement plan. As its name implies, the plans are usually offered only to a company's highly paid executives. Because a SERP is a nonqualified plan, there is no limit on the amount that the company can contribute to it each year. And, since you can't access the money until you either leave or retire, your tax liability will be deferred until the money is taken out. In some cases, however, the SERP money might not even be there when you want to make a withdrawal. That's because the money that is contributed by the company comes from its general operating budget (rather than a special pension fund) and is merely kept as an entry on its books. If the company goes bankrupt or is sold, there's no guarantee that you will get the money you were promised. Some firms buy insurance or set up trusts to protect SERP accounts, but you should be aware of the risks involved in plans that are unprotected.

What is a 403(b) plan?
A 403(b), also known as a TSA, is the government’s formal name for a tax-deferred employee retirement plan that can be adopted only by certain tax-exempt private organizations and certain public schools and colleges. Employees are 100 percent vested in a 403(b) plan and contribute only through salary reductions. 403(b) plans offer features that can make them more attractive than Individual Retirement Accounts (IRA). First, the ceiling for annual contributions to a 403(b) is the least of the following three limits: 20 percent of the employee’s compensation multipled by years of service less prior contributions, 25% of the employee’s compensation or $15,500 in 2007 and 2008. The resulting maximum contribution is usually far greater than the IRA limit. Additional 403(b) provisions allow older employees to "make up" the years when they did not contribute their maximum. Finally, many 403(b) plans allow participants to borrow from their plans. Borrowing against an IRA is prohibited.

What is a TSA?
A tax-sheltered annuity, or TSA, is another name for a 403(b) plan, which is a qualified retirement plan similar to a 401(k) but specifically for nonprofit organizations, public school districts, colleges and certain ministers.

What advantages does a 403(b) retirement plan have over an IRA?
A tax-sheltered annuity, or 403(b) plan, is a tax-deferred employee retirement plan that can be adopted only by certain tax-exempt private organizations and public schools and colleges. Employees are 100% vested in the plan and contribute only through salary reductions. A 403(b) plan boasts several features than can make it more attractive than an Individual Retirement Account (IRA). First, the ceiling for annual contributions can be as much as $15,500, which is much higher than the limit for IRAs. Also, in plans of health, education or religious organizations, the 403(b) allows workers with 15 years of service to "make up" the years when they did not contribute their maximum through a catch-up provision of $5,000. Finally, many tax-sheltered annuity plans allow participants to borrow from their plans; borrowing against an IRA is prohibited.

How much can I invest in my 403(b) retirement plan every year?
One key advantage that a tax-sheltered annuity (TSA) retirement plan, widely known as a 403(b), holds over Individual Retirement Accounts (IRA) is that it allows for much-larger annual contributions. The maximum contribution you can make each year to an IRA is $4,000 in 2007 and $5,000 in 2008 (plus catch-up provisions). But the maximum contribution to a 403(b) plan is the lesser of the exclusion allowance, 25% of compensation or, in 2007/8, $15,500. For plans sponsored by health, education or religious organizations, these limits are modified after 15 years of service by the catch-up provisions. In addition to the annual contributions you make to a tax-sheltered annuity (TSA) retirement plan, your employer may also contribute.

What is the exclusion allowance on a 403(b) plan?
The exclusion allowance is one limit on maximum contributions to a 403(b) retirement plan, also known as a TSA. It is determined by the following equation: exclusion allowance = 20% x current compensation x years of service - prior contributions.

May I borrow from my 403(b) retirement plan?
Some employers permit borrowing against a tax-sheltered annuity retirement plan, also known as a 403(b), while others do not. You can borrow the greater of $10,000 or 50% of your 403(b) (sometimes more) without tax consequences if your plan agreement has provisions for borrowing. Under IRS guidelines, a loan must be repaid in quarterly installments within a 5-year period. However, if the funds are being borrowed to purchase a primary residence, repayment of the loan may be made over a period as long as 30 years. Policy loans are not includable in your taxable income as long as your loan meets IRS guidelines. The ability to borrow against a 403(b) retirement program is another feature that distinguishes them from Individual Retirement Accounts. Money cannot be borrowed against IRAs under any circumstances.

What is a Section 457 plan?
A Section 457 plan is a long-term retirement, deferred-compensation plan available only to state and local government employees and tax-exempt organizations and described in Section 457 of the Internal Revenue Code. Section 457 plans allow employees to defer up to 25 percent of their compensation to their retirement fund, up to a maximum of $15,500 per year in 2007 and 2008. This amount is indexed for inflation. Contributions to a 457 plan are made with before-tax dollars by payroll deduction, which lowers gross pay and thus reduces the annual amount of taxes owed to the IRS. Earnings on contributions grow tax-deferred until withdrawals begin.

Who can participate in a Section 457 deferred compensation plan?
A Section 457 deferred retirement and compensation program is one of the most flexible retirement programs available. However, it is only offered to state and municipal employees and employees of nonprofit organizations. If you qualify, you should seriously consider participating in a Section 457 plan. Contributing to a Section 457 plans is a great way to reduce your annual income tax bill and an even better way to grow your retirement fund on a tax-deferred basis. The plans also have relatively liberal withdrawal rules. And certainly, you should take part in a Section 457 if you are not eligible for a tax deductible individual retirement plan (IRA) or similar program.

Who owns the assets in a Section 457 plan?
Section 457 plans are unique: They are long-term, non-qualified deferred-compensation programs that are available only to state and local government employees and tax-exempt organizations. They’re also subject to some unique provisions and risks. All the assets in a 457 plan are owned by the entity that offers the plan, but the assets of tax-exempt organizations are subject to seizure by creditors. Assets of Section 457 plans established by state and local governments have to be held in trust, which protects them from creditors and money-hungry bureaucrats. Each worker has a segregated account and can direct his or her account balance into any approved investment option.

When can employee distributions from a 457 plan begin?
Withdrawal regulations make Section 457 plans unique among public pension plans. Because the 457 is not a qualified retirement plan, participants may receive distributions regardless of age without penalty since there is no "premature distribution" penalty, as there is with a 401(k) or regular IRA account when funds are withdrawn prior to age 59 1/2. Of course, taxes are due upon receipt of the funds.

When must distributions from a Section 457 plan be made?
Distributions from a Section 457 plan must begin no later than an employee’s reaching the age of 70 1/2. These distributions are subject to the minimum required distribution rules. These rules require the account balance to be distributed over the life expectancy of the participant. Once payments begin, they must be in equal dollar amounts and be made at least annually. Upon termination of employment, the employee has 60 days to make an irrevocable election identifying when distributions will begin. If no election is made, the employee is considered in "constructive receipt" of the funds and the entire account balance becomes taxable regardless of whether the employee actually received the money.

How are Section 457 plan distributions taxed to me?
Distributions from a Section 457 plan -- the long-term retirement, deferred-compensation plan that’s available only to state and local government employees and tax-exempt organizations -- are taxed as ordinary income when the worker receives them. The good news is that, unlike most other plans, penalty-free distributions can be made from a Section 457 plan upon termination of employment -- whether voluntary or involuntary -- and regardless of the worker’s age. Distributions can also be made in the event of an unforeseeable emergency through a "hardship withdrawal."

Can my Section 457 plan account balance be rolled over into an IRA?
Section 457 plans are nonqualified,as a result, funds cannot be rolled over into an Individual Retirement Account (IRA). Proceeds from a Section 457 may only be transferred to another such plan. If you have a Section 457 plan and are leaving your government job to work in private industry, you have two choices. First, you can take the plan’s balance in a lump sum and pay ordinary income taxes on the distribution. Or, you can leave the balance with your previous employer until a predetermined date. If you choose to leave the Section 457 plan where it is, you avoid current income taxes and the balance will continue to grow tax-deferred. You can continue to manage the investments just as if you were still employed, but you cannot make any additional contributions. Beginning in 2002, participants may roll their 457 plan distributions to any other tax favored plan including IRAs and if the plan documents allow it, qualified plans, other 457 plans or TSAs.

What is the catch-up provision in a Section 457 plan?
Unlike most other retirement plans, Section 457 plans have a "catch-up" provision that allows workers within three years of retirement to make larger contributions to supplement the smaller contributions they may have made earlier. In essence, the catch-up provision waives the standard annual limits on contributions. Instead, during the three years preceding retirement, the worker is allowed to contribute up to $15,000 annually into a Section 457 plan. To qualify, the employee must have contributed less than the maximum in previous years. A year-by-year calculation must be completed to determine the exact amount of catch up an employee is entitled to make.

Why is my retirement plan called a Keogh?
A Keogh plan is merely a qualified retirement plan for businesses that are not incorporated. If your employer is a partnership or sole-proprietorship it has a Keogh plan if it has any qualified plan. From an employee’s perspective, a Keogh plan looks just like any similar qualifed plan sponsored by a corporation. The plans were named for Eugene Keogh, a congressman from Brooklyn, N.Y., who sponsored the legislation that created the program in 1962.

What is a Keogh plan?
A Keogh plan is a type of retirement plan for unincorporated businesses. If you run an unincorporated business, either full time or as a moonlighter, you can set up a Keogh to cut your taxes and save for retirement. To qualify for a Keogh plan your earnings must come from your business or from fees for services you provided. Like individual retirement accounts (IRAs), the government puts a limit on the amount you can contribute to a Keogh each year. You can deduct the contribution you make on your tax return to lower your annual tax bill, and the earnings generated by the Keogh are not taxed until they’re withdrawn. For more tax information about Keoghs, see IRS Publication 560, Retirement Plans for Small Business. You can download it at the IRS Web site, or order by calling 1-800-TAX-FORM (829-3676).

What is a defined-benefit Keogh plan?
A defined-benefit Keogh plan is a qualified pension plan for a business that is not incorporated. It offers a fixed benefit amount.

What is a profit-sharing Keogh plan?
A Keogh retirement plan is a qualified plan for an unincorporated business. If you have employees and open a Keogh for yourself, you must also offer a Keogh plan to your workers and contribute to their accounts as well. The simplest -- and, therefore, most common -- type of Keogh plan is the profit-sharing Keogh. The employer can contribute up to 15% of participants’ earnings under this plan. The maximum for any individual is $40,000, or 25% of compensation. The employer must contribute an equal percentage of his or her employees’ salary to their individual accounts. The maximum percentage the employer may contribute to his own account is 13.04%. No minimum amount must be contributed each year, which allows the employer to make the maximum contribution in good years and little or no contribution in lean ones. Money inside the account grows tax-deferred until it is withdrawn. A 10% penalty, in addition to taxes, is levied if withdrawals are made before you turn 59 1/2. Keogh assets also can be rolled over into an individual retirement account (IRA).

What is a money purchase Keogh plan?
A Keogh retirement plan is a qualified plan for an unincorporated business. If you have employees and open a Keogh for yourself, you must also offer a Keogh to your workers and contribute to their accounts as well. Of all the different types of defined contribution Keogh plans, a money purchase Keogh plan allows the largest annual contributions. You can contribute at total of up to 25% of the participants’ earnings. The maximum for any individual is $40,000, or 25% of the individual’s compensation. As with every other qualifed plan, the assets grow tax-deferred until you start making withdrawals, but a 10% penalty will be assessed if the withdrawals begin before you reach age 59 1/2. A money purchase plan is a fixed formula plan that requires the employer to make the same contribution percentage, year after year -- even if the company suffered a bad year. If the required contribution is not made, a penalty of as much as 100% of the required amount may apply. Also, the owner’s maximum contribution is 20%, not 25%.

How do I go about setting up a Keogh?
If you qualify for a Keogh retirement plan, you can hire a pension-consulting company or similar firm to design one for you. However, it’s usually cheaper and easier simply to adopt a plan that has already been approved by the Internal Revenue Service. Many banks, insurers and mutual fund companies offer Keogh "master plans" that have already received the blessing of the IRS. Trade and professional associations also commonly offer "prototype" plans to their members. These off-the-shelf plans spare you the cost and hassle of forming a plan yourself and getting it approved. However, they can’t be customized to fit your unique financial needs and retirement goals-which is why some investors are willing to spend the extra money and have a professional consultant prepare a plan for them. However, you should realize that a Keogh plan is a qualified plan subject to many difficult administration and operating rules. In almost every case, you should use a third party administrator to help you stay within the compliance requirements. A small error can cost thousands of dollars in terms of consultants, penalties, time and lost sleep when the IRS begins looking into your plan.

Are the deadlines for establishing a Keogh and Simplified Employee Pension plans the same?
Keogh and simplified employee pension (SEP) plans are both tax-advantaged retirement programs. However, if you want to set up a Keogh and make a contribution to it in the same year, the Keogh must be established by Dec. 31. The deadline to establish a SEP is April 15 of the following year. In other words, you could open a SEP by April 15, 2008, and make a contribution to the plan for the 2007 tax year. So, if you miss the Dec. 31 cutoff for establishing a Keogh, consider opening and contributing to a SEP plan instead.

Can I set up a Keogh plan if I am self-employed but my business loses money?
Keogh plans are special types of retirement programs for people who are self-employed, or for those who have a side business in addition to their regular job. But your business must have net earnings. If your endeavors aren’t profitable, you probably can’t have a Keogh.

Can I set up either a Keogh or SEP retirement plan even though I also have a salaried job with a big company?
Self-employed pension (SEP) plans are tax-advantaged retirement plans and Keogh plans are qualifed plans for sole proprietorships and partnerships. Generally an individual may adopt either plan if he or she has some type of self-employment income. But fortunately, the Internal Revenue Service uses relatively generous rules to determine who qualifies for a Keogh or SEP. You may be surprised to learn the types of income that are considered self-employment income. For example, director’s fees are self-employment income, as are executor fees. And commission income is self-employment income if you are not considered an employee. If you earn money as a freelancer, you are also probably qualified to establish your own Keogh or SEP as long as you have not incorporated.

I work full-time for a company that offers no retirement plan, but can I establish a Keogh plan because I also work as a freelance consultant?
Keogh plans are qualified retirement plans for sole proprietorsships and partnerships. If you have such a business you can set up a Keogh plan. You can establish a Keogh plan if you make extra money working as a consultant or freelancer, whether this sideline involves computer consulting or selling photos or newspaper articles. Other offbeat sources of income that qualify you for a Keogh include income from a business partnership that files a Schedule K with the Internal Revenue Service, or membership on a board of directors that pays you for the time you serve. You also qualify for a Keogh if you own just about any type of business that requires you to file a Schedule C form when completing your annual income tax return.

If I establish a Keogh for my own retirement, do I also have to offer the plan to the three people who are on my company’s payroll?
Self-employed people who establish a Keogh retirement program for themselves should realize that the government will also demand that all of their employees must be allowed to participate when they meet the eligibility requirements. More important, you must contribute the percentage called for in the plan formula for each participant. Your percentage will be adjusted downward, since your compensation is reduced by the contribution to your account. For example, if the plan calls for a 10% contribution, you would contribute 10% of each worker’s income into their Keogh account and 9.09% into your account. You could deduct the contributions you make to the Keogh plan, but it still may be an expensive proposition even after the tax breaks are considered.

What is a simplified employee pension (SEP)?
A simplified employee pension (SEP) plan is a tax-favored retirement plan that uses an individual retirement account as the funding account. It is very popular among sole proprietors and owners of incoporated businesses. It is sponsored by an employer for the benefit of employees. SEPs work much like traditional Individual Retirement Accounts (IRAs), in fact, a SEP is often called a SEP-IRA. You can contribute up to 15% of salary a year to a SEP and the money will grow tax-deferred inside the account until you begin making withdrawals, usually after you reach age 59 1/2. If the owner establishes a SEP for himself, he must also offer a plan to his employees and fund their plans with contributions of his own. For example, if the owner contributes 10 percent of his salary to his own plan, he must also contribute 10 percent of each worker’s salary to their individual plans. For more tax information about SEPs, see IRS Publication 560, Retirement Plans for Small Business, and the SEP section of IRS Publication 590, Individual Retirement Arrangements. You can download Publication 560and Publication 590 at the IRS Web site, or order by calling 1-800-TAX-FORM (829-3676).

What does SEP stand for?
SEP stands for simplified employee pension, a type of retirement plan that is popular among sole proprietors and owners of small businesses. A SEP is actually a special type of individual retirement account and is sometimes referred to as a SEP-IRA.

What is a SEP-IRA?
A simplified employee pension (SEP) plan is a retirement plan used by many people who run a small business. A SEP is actually a special type of individual retirement account (IRA). As a result, it’s often called a SEP-IRA.

Can I invest in both a SEP and a traditional IRA?
If you are participating in a simplified employee pension (SEP) plan, the Internal Revenue Service will allow you to save even more money for retirement by allowing you to set up a separate Individual Retirement Account (IRA). The money you contribute to the IRA may or may not be tax-deductible, depending on how much you earn and whether you’re married or not. But even if you can’t deduct the contribution on your income tax return, the investments inside the IRA will grow tax-deferred until you begin making withdrawals.

What is the limit on investing in a SEP account?
A simplified employee pension (SEP) plan is a special type of individual retirement account (IRA) that is extremely popular among owners of small businesses and sole proprietors. If you are the owner of an incorporated business, you may contribute up to 15 percent of the salary you pay yourself. Remember that if you establish an SEP plan for yourself, you must offer a similar plan to your workers - and fund their plans with contributions of your own. For example, if you contribute 10 percent of your salary to your own plan, you must also contribute 10 percent of each worker’s salary to his individual plan. If you operate as a sole-proprietor, your maximum contribution percentage is 13.04% for yourself when the overall plan contribution is 15% for your workers.

Can qualified retirement plan assets be rolled over into a SEP?
Assets from a qualified retirement program, such as a 401(k), can be rolled over into a simplified employee pension (SEP) plan. However, SEP assets may not be rolled over directly into another qualified plan. If you want to retain the ability to roll over assets from a qualified plan to a new employer’s qualified plan, you must use a so-called conduit Individual Retirement Account. Beginning in 2002, any pre-tax IRA, including SEP and SIMPLE IRA plans, may be rolled into any other type of tax favored retirement plan such as a qualified plan, TSA, or 457 plan.

What are the employer’s advantages in a SEP plan?
Simplified employee pension (SEP) plans are easy to set up, and there is little or no administrative expense. Reporting requirements are minimal and the plans are extremely flexible. Most workers say a retirement plan is a key benefit they look for when deciding to join or stay with a company; a SEP allows smaller employers to offer such a benefit without a lot of headache or expense.

What are the advantages of a SEP for an employee?
A simplified employee pension (SEP) plan offers several advantages to employees. First, all of the contributions are made by the employer at the same percentage rate for all employees from the chief executive on down, although the contribution can shrink if the business hits hard times. Second, money contributed to the SEP will grow tax-free inside the account until it is withdrawn. Over the years, this tax-advantaged growth can be substantial. In addition, SEPs can offer a range of investment options. And unlike many other types of retirement programs, all the money that is contributed to a SEP immediately belongs to the employee. No gradual "vesting" period is allowed.

How are the assets of a SEP managed?
Assets in a simplified employee pension (SEP) plan are managed by a financial institution rather than by individual trustees. However, employees may be permitted to direct the investments made in their own account. The SEP itself must be established with an insurance company, a bank, a brokerage firm, an independent trustee, or a mutual fund company. Many of these companies have advisors who can help employees make their investment choices.

What are the reporting requirements for a SEP?
An employer’s reporting requirements for a simplified employee pension (SEP) plan are relatively minor. The employer must give each participant notice of an adoption of the SEP and the requirements that must be met by the participant for a contribution. There are no annual government reports required. However, the trustee must furnish annually, on IRS Form 5498, information regarding contributions and fair market values of the SEP. This information must be filed with the IRS and the participant.

What kind of vesting schedule can be used in a SEP?
One feature that distinguishes a simplified employee pension (SEP) plan from many other types of retirement programs concerns vesting. Under some types of retirement programs, a worker isn’t "fully vested" in the plan until a specified period has elapsed. But in a SEP, all contributions are immediately 100 percent vested, which means all of the money that is put into the plan immediately becomes the property of the worker.

Are the deadlines for establishing a Keogh and Simplified Employee Pension plans the same?
Keogh and simplified employee pension (SEP) plans are both tax-advantaged retirement programs. However, if you want to set up a Keogh and make a contribution to it in the same year, the Keogh must be established by Dec. 31. The deadline to establish a SEP is April 15 of the following year. In other words, you could open a SEP by April 15, 2008, and make a contribution to the plan for the 2007 tax year. So, if you miss the Dec. 31 cutoff for establishing a Keogh, consider opening and contributing to a SEP plan instead.

Can I set up either a Keogh or SEP retirement plan even though I also have a salaried job with a big company?
Self-employed pension (SEP) plans are tax-advantaged retirement plans and Keogh plans are qualifed plans for sole proprietorships and partnerships. Generally an individual may adopt either plan if he or she has some type of self-employment income. But fortunately, the Internal Revenue Service uses relatively generous rules to determine who qualifies for a Keogh or SEP. According to the second edition of "Ernst & Young’s Personal Financial Planning Guide" (John Wiley & Sons Inc., New York), "You may be surprised to learn the types of income that are considered self-employment income. For example, director’s fees are self-employment income, as are executor fees. And commission income is self-employment income if you are not considered an employee." If you earn money as a freelancer, you are also probably qualified to establish your own Keogh or SEP as long as you have not incorporated.