In The Market Now's the time to shop for a retirement plan. Find out which one's best for you.

There's never been a better time to establish a tax-favoredpension plan. The benefits are double-barreled for BIZ Experiencess.Setting up a qualified plan not only provides you with a taxdeduction for the contributions you make on your employees'behalf, but the money you contribute to your own account is alsodeductible and is not included in your taxable income untilwithdrawn. (A qualified plan meets the requirements of the EmployeeRetirement Income Security Act and the IRS Code.)

On top of that, your own contributions to your account areallowed to earn interest that's tax-deferred until you make awithdrawal. "The power of compounding with pre-tax money isvery powerful," says Ward Bukofsky, a CPA with Beverly Hills,California, accounting firm Braverman, Codron & Co.

Accountant Mark Cohen, a CPA with New York City accounting firmNewman & Cohen CPA PC, agrees. "We have some clients withseveral million dollars in their retirement plans thanks to regularretirement contributions and related tax deferralcompounding."

Amassing this type of nest egg offers small-business owners asense of security. "All businesses have ups and downs--andsome don't make it,' says Joan Vines, a CPA withaccounting firm Grant Thornton LLP in Washington, DC. By settingmoney aside in a qualified pension plan, it is safe fromcreditors' reach in the event your company runs into financialtrouble. As a result, Vines says, "that money is going to bethere even if the business is not."

The Taxpayer Relief Act of 1997 also makes it easier to setaside funds for retirement in both a company retirement plan, suchas a 401(k), and an Individual Retirement Account (IRA). That'sbecause the new law increases the income limits on deductible IRAsin stages for individuals who are active participants in a pensionplan. This year, you can fully deduct a yearly IRA contribution of$2,000 if your adjusted gross income is $50,000 or less for jointfilers and $30,000 or less for single filers.

Another important change: The new law permanently repeals the 15percent excise tax on distributions from retirement plans(including both IRAs and qualified plans) that exceed $150,000 inany given year.

Joan Szabo is a writer in McLean, Virginia, who has reportedon tax issues for more than 12 years.

What's The Plan?

Despite these benefits, small-business owners often struggleover whether to use profits to grow a business or administer aretirement plan. But there doesn't have to be a choice. Forexample, with the use of a new, low-cost Savings Incentive MatchPlan for Employees (SIMPLE), designed especially for smallbusiness, expenses can be held to a minimum.

If you've put off establishing a plan because of cost orcomplexity, now is a good time to examine the options available toyou. "The sooner you start, the sooner you'll reap thebenefits of a retirement plan," says Cohen.

Here's a brief rundown of the pros and cons of the majorretirement plans:

• SIMPLE: This is one of the newest plans and one of themost attractive options available to small-business owners with 100or fewer employees. With a SIMPLE plan, you can decide whether touse a 401(k) or an IRA as your retirement plan.

A SIMPLE plan is just that--simple to administer. Itdoesn't come with a lot of paperwork or reporting requirements.If you establish one, you must provide a single report to thegovernment only when the plan is created.

Unlike a regular 401(k), making contributions is not optionalwith a SIMPLE plan. The employer must make contributions to theplan by either matching each participating employee'scontribution dollar for dollar, up to 3 percent of theemployee's pay, or by making an across-the-board 2 percentcontribution for all employees, even if they don't participatein the plan. This can be expensive.

"[Another] trade-off for being simple is that the maximumamount each employee can contribute to the plan is only $6,000 ayear," says Vines.

Tax consequences: The maximum contribution amount is oneof the lowest of all available plans. Therefore, the tax deductionfor the contribution will not be as great as it could be with someof the other plans.

• Simplified Employee Pension (SEP): With this plan, youdecide how much to contribute each year on behalf of each employee,or whether to contribute at all in a given year. Employees,however, cannot contribute any of their salary to their ownaccounts. In addition, if you decide to make a contribution, thesame percentage must be applied to all eligible employees. Themaximum contribution is 15 percent of an employee's salary or$24,000, whichever is less.

Tax consequences: The amount of the tax deduction forannual contributions to SEP accounts ranks just under amoney-purchase plan or a profit-sharing plan.

• 401(k) plans: Participants in a 401(k) have a percentageof pre-tax pay deducted from their paycheck and put into anaccount. The funds grow tax-deferred until they're withdrawn.One of the major benefits of a 401(k) plan for small-businessowners is that you can establish the plan, but you aren'trequired to make contributions on your employees' behalf.

Your employees fund their 401(k) accounts with voluntarycontributions. The maximum amount they can contribute yearly is thelesser of $10,000 or 25 percent of compensation. In addition, planparticipants can borrow from their accounts before retirement--ifthe 401(k) is set up that way.

If you decide to establish a 401(k), both you and your employeesmust follow some fairly strict nondiscrimination rules, whichrequire annual mathematical calculations to determine allowablecontribution amounts. The aim is to make sure highly compensatedemployees aren't allowed to make substantially largercontributions than rank and file employees.

Tax consequences: The tax deduction for annualcontributions to a 401(k) is also slightly less than aprofit-sharing plan or a money-purchase plan.

• Profit-sharing plans: One of the most popular plans forsmall-business owners, profit-sharing plans let you either make ornot make contributions based on your own standards, such as companyprofits for the year. Maximum contributions can't exceed 15percent of compensation or $24,000 per employee, whichever is less.If you do contribute, you must use the same percentage for allemployees.

Cohen says the small-business owner's ability to borrow froma profit-sharing plan is a major attraction. "Small-businessowners who have set up partnerships or C corporations, have been inbusiness for several years, and have built up some assets in theirprofit-sharing plan can borrow the lesser of 50 percent of theirvested benefit or a maximum of $50,000," says Cohen."[This option] provides a ready source of capital that theowner can use to grow the business." The loan must be repaidover five years.

Tax consequences: The amount of the deduction for annualcontributions to a profit-sharing plan is similar to that of amoney-purchase plan.

• Money-purchase plans: While these are the best optionsin terms of your deduction, they are sometimes less attractive tosmall-business owners than profit-sharing plans because theyrequire employers to contribute to each employee's accountevery year. In addition, the percentage contributed must be thesame for all employees and can't vary from year to year. Themaximum contribution is the lesser of 25 percent of salary or$30,000. Employers often combine a money-purchase plan with anotherretirement option, such as a profit-sharing plan, to increase theirtax deduction and keep the required contribution to a minimum.

Tax consequences: With a money-purchase plan, it'spossible to make one of the largest contributions to a pension plan(up to $30,000 for the business owner), and thus receive one of thelargest tax deductions. This is only possible if all therequirements of these plans are met.

• Keogh plans: These plans are designed mainly for--butaren't limited to--people who are self-employed. You can alsoset up a Keogh if you own an unincorporated business, such as apartnership or limited liability company. If you have employees,they must be allowed to participate in the Keogh plan.

Keoghs are generally profit-sharing plans or money-purchaseplans. They are especially appealing to high-income soleproprietors or other small-business owners because a money-purchaseKeogh lets you make a maximum annual contribution of $30,000. Inaddition to your ability to defer a good deal of income with thistype of plan, you also receive a sizable tax deduction for thecontribution. Banks, brokerage houses and insurance companies canhelp in establishing a Keogh.

Tax consequences: A Keogh money-purchase plan is the sameas a standard money-purchase plan except it's easier to makepension contributions and take the deduction (up to $30,000) if youare a highly-compensated business owner with no employees.

The IRA Route

If your company is not in a position to offer a retirement plan,it makes good tax sense for you and your employees to considercontributing to a standard IRA or one of the new IRAs created bythe Taxpayer Relief Act.

With the Roth IRA, named after its principal sponsor, Sen.William V. Roth Jr. (R-DE), annual contributions are not taxdeductible, but you will be able to withdraw money without payingtaxes if certain conditions are met. (See "11th Hour,"December 1997.)

"Taking advantage of the Roth IRA might be more attractivethan contributing to a 401(k) plan for some taxpayers," saysVines. "If you go into a 401(k), you get a deduction on thefront end, so when you start taking out the money, it's alltaxable. Some taxpayers may conclude it's better to forgo thededuction on the front end than to have free earnings comingout."

As you can see, pension plan options are plentiful. Don'tdelay--get the benefit of tax savings while you watch your nest egggrow.

Contact Sources

Braverman, Codron & Co., 450 N. Roxbury Dr., 4th Fl.,Beverly Hills, CA 90210, (310) 278-5850

CCH Inc., (847) 267-2484, http://www.toolkit.cch.com

Grant Thornton LLP, (202) 967-0580, fax: (202)967-0582

Newman & Cohen CPA PC, (212) 967-0580, fax: (212)967-0582