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My husband, 56, receives his partial fed. annuity from taking 'early out', and also is developing his own consulting business. He would be called 'owner-employee' I guess. I have several questions about income from his own business.

1) First, can one contribute to a Keogh or SEP or Simple up till same age as an IRA? (70.5?) I read the Retirement school info, but I don't see this fact there. I do see that money can't be withdrawn before age 59.5 without penalty.

2) Is there a reason that one type of self-empl. retirement acct would be preferable to others, assuming we are able to put in max. amount possible? Why would one select a different type? I know Keogh permits highest percentage, and w/Vanguard, for example, the only fee is $10.00 to join. Other companies are free, as I understand from posts to me here.

3) If he has a choice between getting an entire grant contract in one large lump sum yearly or paid to him monthly,
is there any good reason to get it monthly?

4) Do you think putting max in the retirement acct. is best idea, better than investing it some other way? I know that depends on other things, but excluding the fact that you can't take it out till age 59.5. Aside from that fact, is there some other reason to do it differently?

Thank you in advance for your assistance! meowiz
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I know nothing about Federal annuities so I will assume that nothing your husband does at this point with regard to earning money can endanger his continued receipt of that annuity income. If that is the case, then the real central question becomes: "What is the best deferred savings mechanism for an independent consultant?"

I would suggest that your husband either incorporate making an "S" election or become an LLC (Limited Liability Company. The choice here is complex, so I will skip the details at this time. Suffice to say, IMHO it is always wise for an independent consultant to have limited liability.

There is a second benefit. Either the corp. or the LLC can adopt a profit sharing plan. Typically, though not necessarily, the profit sharing plan will have 2 components:

1. A money purchase component which is an annual mandatory contribution equal to X% of pay; let's say 10%.

2. A profit sharing component which is a discretionary contribution equal to Y% of pay; let's say 15%.

The sum of X and Y can not exceed 25% and Y can not be greater than 20%.

Almost any discount broker can set you up with their regional prototype plans at minimal cost ($25 to $100 per year). This structure & plan adoption mechanism beats the pants off of SEP's, SIMPLE's and IRA's put together.

Regarding your question about receiving a lump sum versus monthly payments --- I would assume a lump sum can be rolled into a Rollover IRA. If so, it's pretty easy to tumble the numbers. Let's say the lump sum is $100,000 & the monthly amount is $500. That's 6%. I think any FOOL can do better than that; thus take the lump sum. On the other hand, if the monthly amount is $1500, that's 18%; pretty tough to beat.

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Regarding your question about receiving a lump sum versus monthly payments ---
I would assume a lump sum can be rolled into a Rollover IRA. If so, it's pretty
easy to tumble the numbers. Let's say the lump sum is $100,000 & the monthly
amount is $500. That's 6%. I think any FOOL can do better than that; thus take
the lump sum. On the other hand, if the monthly amount is $1500, that's 18%;
pretty tough to beat.


Hi Badger! Thanks for all the details in your post. I have to study them to understand still and will print to show my husband. Re: the paragraph above, I wasn't sure if I was clear...I was referring not to his federal annuity monthly payments here...I was intending to ask whether it would be better to receive a specific grant contract (self-empl. income) all in one big amount, or have it paid out to him monthly. thanks. Hope that's clearer. meowiz
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Ah ha, I obviously mis-read your post. Q3, now that I re-read it asks when should one want to receive taxable income from consulting services; all at once or spread out over time? To this issue IMHO;

1. As a provider of service, it is great luxury to be in a creditor position:

a. You never have to worry about getting paid.
b. You can invest the excess monies received in advance of work performed.
c. God forbid that there would ever be a squabble between yourselves & the granting organization (payor) but if there is, possession is still 9/10ths of the law.

2. The disadvantage is that (assuming you will be a cash basis taxpayer) you will have to pay tax on the entire amount in the year received. Nonetheless, you have the cash to pay the tax.

All of my above comments presume a 6 to 18 month contract. If we are talking about a much longer term contract, say 3 to 5 years or more; I would modify my response to something like negotiating a scheduled payment system that always keeps you 3 to 6 months ahead in revenue relative to when the actual work would be performed.
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Meowiz writes:

<<My husband, 56, receives his partial fed. annuity from taking 'early out', and also is developing his own consulting business. He would be called 'owner-employee' I guess. I have several questions about income from his own business.

1) First, can one contribute to a Keogh or SEP or Simple up till same age as an IRA? (70.5?) I read the Retirement school info, but I don't see this fact there. I do see that money can't be withdrawn before age 59.5 without penalty.>>


Yes, he may. In fact, he may do so after age 70 1/2 provided he has employment income to do so at that time. The normal age 70 1/2 restrictions on IRA contributions do not apply to SEP, SIMPLE or SARSEP contributions. They apply only to traditional IRA contributions a person makes that have no connection with his/her employment. Employer-provided SEP, SIMPLE or SARSEP IRAs are exempt from this requirement.

<<2) Is there a reason that one type of self-empl. retirement acct would be preferable to others, assuming we are able to put in max. amount possible? Why would one select a different type? I know Keogh permits highest percentage, and w/Vanguard, for example, the only fee is $10.00 to join. Other companies are free, as I understand from posts to me here.>>

TheBadger gave you an excellent response to this question. I'll just add that you're really asking questions that are unanswerable by anyone on this board. We don't know enough about your entire financial situation, let alone your goals for the future. Therefore, I strongly urge you not to act on anything said here without seeing your own professional advisors. We can provide general information, but that's insufficient for you on which to base a decision. Indeed, it could lead to some serious problems. Accept our responses for what they are, and that's information only. Do not -- under any circumstances -- think it's all you need to consider.

<<3) If he has a choice between getting an entire grant contract in one large lump sum yearly or paid to him monthly, is there any good reason to get it monthly?

4) Do you think putting max in the retirement acct. is best idea, better than investing it some other way? I know that depends on other things, but excluding the fact that you can't take it out till age 59.5. Aside from that fact, is there some other reason to do it differently?>>


That's another set of unanswerable questions. We don't know your tax situation or your ultimate desires for distribution. Even if we did, it might not be enough to provide a considered answer. Only your tax advisor, estate planning attorney or financial planner (or all acting together) can adequately address these issues.

I think Fooldom is great or I wouldn't be here. I agree you can find a wealth of information available on our boards. But I worry a lot when I see questions such as yours. I fear you may take our responses as gospel, and that's far from true. Use our responses as background only for knowledgeable discussions with the professionals you consult. Those are the folks who should be providing you the alternatives so you can make the decisions that are best for you. Unfortunately, we can't -- and shouldn't -- do that.

Regards….Pixy
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Thanks, Badger and Pixy for your replies.

Pixy said, ... We don't know your tax situation or
your ultimate desires for distribution. Even if we did, it might not be enough to
provide a considered answer. Only your tax advisor, estate planning attorney or
financial planner (or all acting together) can adequately address these issues.

I agree you can find a wealth of
information available on our boards. But I worry a lot when I see questions such
as yours. I fear you may take our responses as gospel, and that's far from true.
Use our responses as background only for knowledgeable discussions with the
professionals you consult. Those are the folks who should be providing you the
alternatives so you can make the decisions that are best for you.


Pixy, I understand what you are saying. Because I'm such a novice at managing finances, I don't even realize which of my questions are beyond the area of the Fool. My husband knows this too, and would never just take my newly learned idea of the day and implement it! He's so busy writing these grants, he doesn't have time right now and says we'll see someone professional later. So I ask these things as I think of them. Thanks for your time, I appreciate it. meowiz
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Meowiz sez:

<<Pixy, I understand what you are saying. Because I'm such a novice at managing finances, I don't even realize which of my questions are beyond the area of the Fool. My husband knows this too, and would never just take my newly learned idea of the day and implement it! >>

Good. We'll probably answer all questions. I just didn't want you to get the impression that what you read here is the bottom line as to what's really best for you.

Regards....Pixy
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