contract "employees" retirement account

From: ldavis@ix.netcom.com (Lynn R Davis)
Subject: contract "employees" retirement account
Date: Sat, 8 Aug 1998 12:55:39 -0500 (CDT)

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"Catherine Steinberg" <CSTEINBE@us.oracle.com> asked:

>I'm currently a staff employee for a software company, and have been offered
>a contract position at another company for about 50 percent more than I'm
>making now. I have been participating in my current employer's 401(K) plan,
>but as a contractor, this will no longer be an option. However, I still want
>to sock away savings for retirement.

Cathy:

Are you a CONTRACTOR or an EMPLOYEE of the new entity?  If you are actually a 
contractor (e.g. you pay self-employment taxes at the full 15.3%, whereas employees 
have the employer pick up half of that for them), then you are SELF-employed, and 
not an employee.

Anyone who has ANY self-employment income in any year can open a KEOGH plan, which 
is simply your own one-employee retirement plan.  There are lots of places to open 
one.  I prefer to have mine self-directed.  My life insurance agent at The New 
England told me about their program, where I use their plan and pay an annual fee, 
but I run the plan, with its own checking account and investments.  The cost was $80 
the first year and $40 each year thereafter (so far).  I am sure that there are many 
others out there offering Keogh plans where they are the trustee and you invest in 
their mutual funds.  

My plan is a "profit sharing" plan where I can decide each year how much of my 
self-employment income to put in, up to a maximum of "15%" of "self-employment 
income".  [I say 15% in quotations because it is really 15/115 the way they 
calculate it, or about 13% of what most people would consider "income".] I have 
until April 15th (or when I file my tax return each year) to decide how much to 
contribute from the previous year's self-employment income.  

But again, Keogh plans such as I have described above are for those who report their 
income on Schedule C as self-employed business people with no employees, not for 
"employees" of any type.  Keogh plans are also for people who have a Schedule C 
business on the side (with no employees), even though they themselves may be 
employees elsewhere.  

(Business owners who have employees can open Keoghs as well, but that gets WAY more 
complicated as you have to cover your employees as well in most cases, and involves 
issues much more complex than I can discuss here.  If you own any significant part 
(I think it is 5% or more) of ANY business anywhere that has employees, lots of 
special rules would apply to you.)

Lynn Davis
Fremont, CA



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