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Want to Retire Rich? Get a Keogh Plan Now
It doesn't cost much to run, and employees can benefit, too

We haven't come to the end of 1998 yet, but you can see it from here. With that in mind, it's time to start dealing with yearend financial planning. First on your list: a Keogh retirement plan.

If you've already got one, congratulations. A Keogh is one of the best deals available to entrepreneurs for preserving and increasing wealth that you've taken out of your company in the form of salary. It can also be a cheap way to help your employees. If you don't have a Keogh, it's time to get moving, because these accounts have to be set up before the end of the year to get the tax benefit on your 1998 return.

You'll have plenty of company. Investing for retirement is the top priority of most of the small-business clients of Walter Schwartz, a financial consultant at Merrill Lynch in Pepper Pike, Ohio. And so-called Keogh plans, he says, are the most popular pension plan option.

"It's a cost-efficient plan," says Schwartz. It allows business owners to put aside more dollars than most rival plans, and the cost of administration is low. From the Keoghs' origins as a plan strictly for the self-employed, it has evolved into a sort of mini-401(k). "I think Keoghs are appropriate for businesses with up to about 25 employees," says the Merrill broker.

GIVE ME SHELTER. The name "Keogh" is an anachronism, referring to the original design. The contemporary model is properly known as a defined contribution pension plan with profit-sharing and money purchase options. Its chief appeal is that it allows entrepreneurs to shelter as much as $30,000 of annual income from current taxes -- more than other defined contribution plans.

Keoghs work like this. The employer -- you -- adopts an IRS-approved plan document. Banks, mutual fund companies, and brokerage houses all have preapproved documents, so this administrative cost is nil. The employer will also make all contributions to the plan, whether it covers one or 1,000 individuals. By contrast, 401(k) plans allow employees as well as employers to contribute pretax dollars.

Keogh plans can include either of two funding options, or both to allow maximum contributions. The first is called profit sharing. As that phrase suggests, contributions are voluntary and can range from zero, in the years when profits are slim, to a maximum of 15% of salary, or $24,000, whichever is lower, in the years when profits are lush.

The second option is called money purchase. Contributions are mandatory, but this allows an employer to bring total tax-deferred contributions to a maximum of 25% of salary, or $30,000, whichever is lower. David Morse, a partner of the employee-benefits practice Whitman Breed Abbott & Morgan in New York, says: "What small-business owners do if they want to max out is to commit to putting 10% of salary a year into the money purchase option and give themselves room for a discretionary 15% profit-sharing contribution."

If you adopt a Keogh for yourself, you must also make contributions at the same percentage rate for all full-time employees. To encourage workers to stay with the company, you can vest them in the plan over a period of up to two years. IRA-type plans require immediate vesting.

But you can also tilt a Keogh in favor of yourself, notes E. Thomas Foster Jr., first vice-president and retirement specialist for John Hancock Funds in Boston, through IRS-approved loopholes, which allow you to weight profit sharing by age of the employee (the older ones get more money). Just be aware that customized plans can be more expensive to create, so make sure the benefit will be big enough to justify the added cost.

A couple of other caveats: Keogh plans require more paperwork than IRA-type plans, including an annual report to the IRS, which your accountant might charge you several hundred dollars to prepare. And although you don't have to fund them until Apr. 15, as with IRAs, you must create them before Dec. 31.

But for a small company, such as a group of partners or a shop where the boss is the only highly paid worker, Keoghs can allow the owner to save the most for his own retirement with the least additional expense for administration and contributions on behalf of workers. Indeed, it's so generous that Congress might someday stop new Keoghs from being created, as it has already done with most SEP-IRAs. Check this pension plan out before it's gone.

By Tim Middleton in Short Hills, N.J.

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SIDEBAR: Timing Is Everything

Setting the Record Straight: A Guide to Organizing Your Financial Papers


Timing Is Everything

You have until Apr. 15, 1999, to fund your 1998 retirement plan, but your nest egg will grow much faster if you make your contribution earlier. Assume you qualify and can afford to make the maximum contribution of $30,000 to a Keogh plan. If you make it on Apr. 15 of next year, 10 years from now it will be worth $58,860, assuming you earn an 8% return. If you had made the contribution in January of this year, however, you would have been earning that 8% for an additional 15 1/2 months. In December, 2007, you would have $64,768 -- an investment bonus equivalent to more than 10% of your total portfolio balance. The early contribution is perfectly legal -- and powerful financially.

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