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Author: inquisitive111 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 8108  
Subject: Retirement funds & financial aid Date: 10/11/2001 6:24 AM
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Our situation is probably fairly unique, but my question concerns how to structure our retirement funding within the next couple of months. The need to resolve our retirement questions as soon as possible is obviously needed just to quickly get our retirement house in order after, unfortunately, too many years of a short-sighted, haphazard approach. However, there is now an additional urgency to get it done before the end of this year, due to our son's rapidly-approaching college entrance in 2003 (with the "base period" for determining financial aid eligibility beginning at the start of this upcoming 2002 calendar year).

The basic problem is that we have kept our retirement fund just sitting in a Money Market Deposit Account, with no specific retirement plan set up for it. These funds, I suspect, need to now be quickly converted into some kind of official retirement plan (qualified or unqualified) so that these retirement assets will be appropriately "sheltered" when determining the "Expected Family Income" on our son's Financial Aid application. (On the other hand, is such a quick conversion to a more official retirement plan really necessary for this shelter, after all, or would it be sufficient to just keep the funds in our corporate MMDA or CDs, etc., simply identified as "Company Retirement Fund"?)

Here's the background. As 55-year-old owners of a very small business with both a "closely held" S corporation component (with no non-owner employees) and a self-employed Schedule C component, we got started quite late with realizing how quickly time was flying by and that we really needed to save for retirement -- and so began just a few years ago, whenever we could, by setting aside in the MMDA whatever large sums we could make available as our retirement fund (now around $200,000). Since these funds had already been taxed to the corporation or to us, and since the amounts we were "contributing" far exceeded the annual limits of the standard qualified plans, we never bothered to set up anything like that (in addition to our seriously risk-averse nature at this stage of life and our fear of high fees eating away our funds).

However, now I'm concerned that such an "unofficial" retirement fund as ours could be considered by the financial aid folks as assets that won't be considered and sheltered as a legitimate "retirement" fund. So, since we will need as much financial aid as possible for our son's college years (so we don't have to plunder our retirement funds), I'm trying to figure out how we can quickly convert these funds into an appropriate retirement plan that will qualify for the shelter. Furthermore, of course, I really want to finally go ahead now and set up whatever kind of plan would be best for us in the future as we continue to try to save and invest for retirement (including any appropriate tax-deferred earnings on our funds).

So -- from what I've been able to see, in trying to do some homework on the various kinds of plans and their significant annual contribution limits, it seems to me that, at this point, we probably really have only three basic options for converting our retirement funds into a more official retirement plan:

(1) Set up a Qualified Defined Benefit Plan as a company pension for our corporation right away. However, my questions concerning the feasibility of this are (a) how hard (and expensive) is it to set this up quickly, (b) how do I get the IRS formula (that uses actuarial projections) for funding this, in order to determine if the bulk of our funds can actually be "contributed" to this pension plan, and (c) do I need to quickly become an employee of the corporation this year to set up such a plan (since my highly-paid "employee" status ended a few years ago, with income now mostly received through the "self-employeed" component)?

(2) Go the much-maligned Annuity route (since our funds are already "after tax" monies, which have no contribution limit). However, my questions concerning the desirability of this are (a) how hard (and expensive) is it to set this up quickly, (b) how should I shop around to get the best alternative and avoid the traps of expensive products, etc., (c) does a variable annuity offer the greatest flexibility for use of the funds, and (d) again, do I need to quickly become an employee of the corporation this year to set up such a plan?

(3) Or, perhaps I will just have to set up a Non-Qualified Plan (again, since our funds are already "after tax" monies). However, my questions about this option concern (a) not only whether I need to reestablish my "employee" status, but also (b) where to find out how such a Non-Qualified Plan would actually be set up quickly and how hard or expensive it would be (or is that essentially what we now have in the MMDA without having to set up anything new)?

I just don't know where to turn next. So, in addition to feedback on whether any of these three options are feasible for us in our situation, please let me know if there are any other approaches that would be more appropriate or, at least, worth considering (including the best route for future years, if different from what we should do this year). Thanks so much, in advance, for your time and assistance in quickly providing some info and direction for us!
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