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Self-employed individuals

You're treated as both the employer and employee under SIMPLE plan rules, even though you're self-employed. This means you can make both employer contributions and employee salary reduction contributions based on net earnings from self-employment.

Comparing retirement plan options for 2005:
Maximum deductible contributions for self-employed individuals

SIMPLE IRA combined salary reduction SEP, profit-sharing plan
Compensation* plus 3% employer matching or money purchase plan
$_25,000 $10,750 $_5,000
__50,000 _11,500 _10,000
_100,000 _13,000 _20,000
_200,000 _16,000 _40,000
250,000 17,500 42,000
*Illustrations do not reflect any reduction in self-employment income for one-half of the self-employment tax.


Strategy: Optimize your retirement savings with a SIMPLE plan if your self-employment income is about $40,000. You may be able to save more through a SIMPLE plan than with a SEP or other qualified retirement plan. If you have self-employment income of $30,000 from a sideline business, consider the SIMPLE IRA to save for retirement on a tax-advantaged basis.

Converting SIMPLE IRAs to Roth IRAs

You are allowed to convert your SIMPLE IRA to a Roth IRA. Doing so means reporting all of the funds in the account-your own contributions, employer contributions and earnings on contributions-as income in the year of the conversion. Although rollovers to regular IRAs are subject to a 25% penalty if made within the first two years of plan participation, this penalty does not apply to conversions to Roth IRAs.

Strategy: Convert from a SIMPLE IRA to a Roth IRA to create future tax-free income only if you have the cash to pay the tax on the -conversion. Using SIMPLE IRA funds for this purpose limits your future tax-free income and triggers a penalty on the funds not converted if you're under age 59¬? and/or you haven't participated in the plan for at least two years.

IRA record keeper

In order to coordinate your investments, you need to maintain good records for each of your IRAs. You can do this with paper records, with computer software or even online.

Also keep track of beneficiary designations. Don't rely on your IRA custodian to maintain beneficiary designation forms. Financial institutions merge, relocate or simply lose records over time.

Strategy: Make new beneficiary designations if you no longer have copies of former designations. Ask each IRA custodian for a beneficiary designation form. Retain a copy of each new form for your records.

Special considerations for married couples

Married couples have a unique opportunity to save for their retirement. The tax laws permit contributions to an IRA for a nonworking spouse. And they create special protections for certain qualified retirement plan benefits for the nonparticipant spouse. But the law also adds restrictions on the ability of one spouse to contribute to an IRA when another spouse participates in a qualified retirement plan.

IRA benefits for a nonparticipant spouse

What happens if your spouse is covered by a qualified retirement plan but you're not? If you're working, you may be eligible to make deductible contributions to your own IRA. (Different MAGI limits apply in the case where both spouses are active participants.) You can make a fully deductible contribution if your combined MAGI is no more than $150,000. The deduction phases out for MAGI between $150,000 and $160,000. No deduction can be claimed if MAGI exceeds $160,000.

Example: You and your spouse both work but only one is covered by a qualified retirement plan. If your combined MAGI in 2005 is $60,000, you can each make a fully deductible IRA contribution because you don't exceed the $70,000 MAGI limit. If your combined MAGI is $125,000, only you can make a fully deductible IRA contribution. In this event, you've exceeded the $70,000 limit but are below $150,000. But if your combined MAGI is $175,000, neither you nor your spouse can make a fully deductible IRA contribution because you've exceeded the $160,000 limit.

IRA benefits for a nonworking spouse

If only one spouse works, you can fund an IRA for the nonworking spouse based on your income. Your contribution limit for your spouse is $4,000 in 2005. Of course, if you're an active participant in a qualified retirement plan, your MAGI must permit you to make a contribution. The same is true if you opt for a Roth IRA.

Strategy: Contribute to a deductible IRA on your spouse's behalf even if you can't contribute to your own account because of the age limit. If you're over
age 70¬? but your nonworking spouse is under age 70¬?, you can contribute
to a deductible IRA for your spouse. Age is no barrier to making Roth IRA contributions-for yourself or a nonworking spouse.

Coordinating contributions

Married couples should consider dividing available funds between both spouses' IRAs if they lack the funds to make maximum IRA contributions to each account. This will enable each spouse to build up a personal retirement fund.

Strategy: Contribute more heavily to the younger spouse's IRA for a longer period of tax-free buildup. But if the couple expects to tap into IRA funds for retirement income, contribute more heavily to the older spouse's IRA.

Above and beyond retirement plans and IRAs

When you've contributed the maximum allowed to your 401(k) plan, IRA or other plan, you may still have available funds that you wish to save on a tax-advantaged basis. Consider the following approaches to supplement your retirement savings and improve your retirement income:

* Annuities. Annuities allow you to defer tax on earnings until you take distributions (i.e., begin to annuitize). Depending on state law and the terms of your policy, you may not have to take any distributions before age 90, allowing for years of tax-deferred buildup. If you die before starting distributions, the funds generally are payable to your named beneficiary.

* Pay down debt. A shrewd way to position yourself financially for retirement is to reduce debt and lower your monthly obligations. If you've maximized contributions to qualified plans and IRAs, use extra cash to pay down outstanding debt. Caution: Carefully weigh the advantages of paying off a home mortgage. You lose a tax deduction for the interest -portion of payments. And, if the mortgage interest rate is low, you may profit by investing the extra cash.