Roanoke Times
                 Copyright (c) 1995, Landmark Communications, Inc.

DATE: MONDAY, October 10, 1994                   TAG: 9410140022
SECTION: BUSINESS                    PAGE: 8   EDITION: METRO 
SOURCE: MAG POFF STAFF WRITER
DATELINE:                                 LENGTH: Medium

THE DO'S AND DON'TS IN SAVING FOR RETIREMENT

By contributing some self-employment earnings to a Keogh plan or a Simplified Employee Pension plan, the self-employed can cut next spring's income tax bill while saving for retirement.

If you're self-employed, the Virginia Society of Certified Public Accountants says it's wise to contribute as much as you can as early as you can to qualified retirement plans. Contributions will decrease your taxable income, and your money compounds tax-free until withdrawal. And the more you contribute, the more you will have for your retirement years.

For 1994, the maximum salary that can be taken into account when calculating a contribution to a Keogh or SEP is $150,000. There are further limitations on Keogh contributions. If you have employees who meet eligibility requirements for Keogh benefits, you must contribute the same percentage of income for those employees as you do for yourself.

Most Keoghs are defined contribution plans. With a defined contribution plan, you set aside a specific amount of your net earnings each year - untaxed - and invest this amount in a retirement plan.

Defined contribution plans come in two types: profit-sharing plans and money purchase plans. Typically, contributions to a profit-sharing plan are made from a company's profits. Each year, you can decide whether or not to contribute to the plan and the amount of your contribution. There is no yearly funding requirement.

Contributions to a money purchase plan also are calculated as a percentage of self-employment income, but this type of plan requires you to contribute a pre-set percentage of your self-employment income each year regardless of whether the company had a profit or loss.

Under a second, more complex type of Keogh plan, the defined benefit plan, you promise yourself an annual benefit amount for your retirement years. Your annual contributions are then calculated based on how much you need to contribute each year to meet your retirement goals. The size of your contribution can be significant and vary from year to year. This type of Keogh plan appeals primarily to older individuals who are in a position to shelter most of their income.

SEPs also are defined contribution plans. They are usually set up by employers to make contributions to their own (if self-employed) and their employees' retirement. Because SEP plans are more flexible and easier to set up and administer than Keoghs. They enable an employer to make retirement funds available to employees without becoming involved in more complex retirement plans.

SEP contributions are tax deductible, and the earnings in a SEP accumulate tax-deferred until they are withdrawn. You may choose not to contribute to a SEP in a given year or to change the percentage of your contribution from year to year.

If you want to deduct retirement contributions from your 1994 income, now is the time to consider whether a SEP or Keogh is best for you. The government gives you until Dec. 31 formally to establish a Keogh plan. You then have until the due date of your tax return, including extensions, to fund your Keogh plan for the year.

With a SEP plan, you have until the due date of your tax return, including extensions, both to establish a plan and to make your contributions.

You do this by seeing a bank or broker who can act as trustee of the plan.

You may invest your SEP or Keogh in a wide range of vehicles, including certificates of deposit, stocks, bonds, mutual funds and real estate. CPAs urge you to monitor your retirement investments just as you would your personal investment portfolio. The retirement benefit you receive is based not only on how much you put away, but also on how well the money was invested.