A few weeks ago we talked about various retirement plan options. I am assuming that you are keeping your SEP plan (instead of a 401(k) plan for example) and are looking to fund extra tax advantaged monies personally. To set the stage — every taxpayer with earned income (or a spouse with earned income) can fund an IRA of $4,000 per year ($5,000 if over 50). This overall IRA limit can be split between three types of IRAs — a Roth, a deductible IRA or a nondeductible IRA. If your adjusted gross income is between $156,000 and $166,000, you can still fund a partial Roth. The difference between the $4,000 (or $5,000) IRA limit and what you fund in your Roth, can go into a nondeductible IRA. In 2010, you will be able to convert these nondeductible IRA’s into Roth IRA’s, without regard to how much money you make (you will have to pay tax on the earnings). However, if neither one of you has an outside job with a retirement plan, your adjusted gross income is less than $156,000, and the SEP is funded for one of you (assuming a sole proprietorship or single-member owner), than the other spouse can fund a deductible spousal $4,000 IRA (or $5,000). See your CPA for full details.

Any business owner, whether they own a small business, large business or a sole proprietorship have an incredible retirement plan option that was available beginning January 2006: A 401(k) that allows for both pretax contributions and Roth 401(k) after tax contributions. As a participant in the plan, you as an individual can invest on an after-tax Roth basis or on a pretax basis. In addition, your company can contribute to the plan as well, but only on the pre-tax side. The Roth 401(k), like the Roth IRA, grows tax deferred and the income that you take after age 59 /2 is tax-free. The beauty of the Roth 401(k) becomes most evident in how it is unlike the Roth IRA: 1).You, as an individual, can invest as much as $15,500 ($20,500 if you are over 50) for 2008, based on earned income in the Roth 401(k). The Roth IRA only allows a $5,000 (plus $1,000 catch-up if you are over 50) for 2008. 2). Your income is not a factor in whether or not you are eligible to participate in a Roth 401(k). On the other hand, with the Roth IRA, if your family income exceeds $159,000 in 2008 you are phased out as to how much, if anything, you can invest in a Roth IRA. Today there are many very low cost 401(k) plans to choose from. As a small business owner, you should consult your financial adviser about whether or not a 401(k)/Roth 401(k) plan makes sense for you and your business.

According to Roth IRA rules, to qualify for the maximum contribution, married taxpayers filing a joint return must have a 2007 combined Adjusted Gross Income (AGI) of less than $156,000 and your earned income must be at least as much as the amount you want to contribute to the Roth IRA. For singles, you must have an AGI of less than $99,000. If your income is $150,000, then you would qualify for a partial ROTH contribution. You could also look at ways to reduce your AGI (Adjusted Gross Income) in order do have your income below $150,000. An example would be setting up a retirement plan that allowed you to make employee contributions which reduces your AGI. There are many different retirements plans that you can consider that may not only allow you to make the ROTH contribution, but would let you save more in the new retirement plan than you can in the SEP. One option of one of the newer plans is to have a ROTH 401(k) plan that allows you to elect your salary deferral as ROTH contributions. These contributions are not subject to the same income limitations as the individual ROTH IRAs but have the same features. In today’s world, there are many great options for saving for retirement, always sit down with a professional that understands retirement plans and your needs before making a decision on what’s best for you!

Congratulations on your successful business. One thing you may want to check into is the Individual 401(k) (also referred to as the “Solo 401(k)” and “Single(k)”). This plan was designed for a one-person company, or an owner and his/her spouse. The individual 401(k) is very similar to your current plan, but offers the ability to borrow against the value of your 401(k). Tax-free loans (up to 50 percent of the total 401(k) value with a $50,000 maximum) are permitted in an individual 401(k) plan. Some business owners find this provides a level of comfort, in case they hit a speed bump when it comes to cash flow. This is just one idea that you can discuss with your accountant. Your accountant should also have some other ideas based on your specific business and personal tax situation.