IRA or 401k

[Guest jentran_67]

I'm looking into a retirement plan and is not sure an IRA or a 401k will better suit me. I work for myself and own a small salon business. I don't want anything too complex. I'm not too sure the difference between tax deferred and tax deducted and all other tax related terms. I appreciate any help with my situation. I've researched and learned a little about each one between the traditional and roth, but still hasn't help me lead to an answer.

Thank you in advance,

~Jen

[John G]

Jen, good question, and one that many small business people face. I think we need more information before we can comment. Please answer a couple of questions:

1. What is the maximum you expect to set aside each year in a retirement program? Would you like to do this on a monthly plan, or a lump amount once each year?

2. What is your current age? When do you think you might retire?

3. In today's dollars (called current dollars), how much do you think you would need to support yourself in retirement? For example, if you make 50k now, you might be very comfortable with 40K (about 80% of current income). Just make a reasonable guess.

4. Do you have employees at your business at this time that would be participating in any plan?

5. Is you business incorporated, or are you basically self employed?

6. Do you have an accountant?

You have many choices for retirement plans, depending upon your answers. You might elect a combination of approaches. Often your accountant can give you some ideas based upon the various options used by similar clients.

Roth basics: a Roth is a specific type of IRA, it will cover just you, annual max is $4000 but will bump up when you are 50 and in future years, you use after-tax dollars, your withdrawals are tax free, generally you are in charge of investment decisions (that may sound scary but most folks can pick up the basics). You can set up a Roth for 2006 by the tax filing deadline in April 2007, but for some other retirement programs you would have only the next two weeks to get the mechanism in place and write the check. You spouse can also have a Roth based on either their or your income.

Tax deferred means that you assets can increase in value over many years and you only have a tax consequence when you dip into the funds. 401K and standard IRAs are tax defferred.

Tax deductible means that you get an immediate write off for contributions to the retirement program. Some folks have tax deductible IRAs. Roths have no tax deduction (you fund them with after-tax dollars) but you don't owe taxes on the withdrawals, which can be very important if your assets mushroom in size.