Question: My company is small and doesn't have a 401(k) plan... a real bummer I know. What can I do or should I do?

Betty Castelli

Answer:

Dear Betty,

First of all, if you work in a company with 100 employees or less, get together with your fellow coworkers and lobby the owner of your company to set up a SIMPLE retirement plan, also known as a Savings Incentive Match Plan for Employees. Employees can contribute up to $10,000 per year; the employer match can also be up to $10,000 per year. If you are 50 or older, you can contribute an additional "catch-up" amount this year of $2,500.

Whether or not you wind up with a SIMPLE, you should definitely start an IRA. You can do so here at BUYandHOLD; simply click HERE for details. There is no minimum to open the account.

You have a choice between the original, traditional IRA with which you get an upfront tax deduction for the amount you contribute or you can go for the newer Roth IRA. Contributions to the latter are not tax deductible, but the advantage is that when you withdraw your money it is tax-free, provided you are 59 1/2 or older and that you have had the account for at least five years. And, with the Roth, you are not required to start taking out money by age 70 1/2. You can leave it in the account, growing tax-free, for as long as you wish.

The maximum you can contribute to an IRA for tax year 2006 is $4,000. (Again, if you are at least 50 years old, you can add another $1,000 to that amount.)

Caution: You may or may not be able to take the maximum IRA deduction if your spouse is covered by a qualified pension plan or the maximum contribution if your income is above a certain cap. To determine the amount you can contribute to either type of IRA, use the calculator at: www.morningstar.com. On the home page, click on "Tools" and then "IRA Calculator".

I strongly recommend that you put the full allowable amount in your IRA. You have until April 15th to contribute for the 2005 tax year.

Another possibility is for you to do some freelance work. That would qualify you for a Keogh. Keoghs are available to self-employed people including sole proprietors who file Schedule C. The great advantage a Keogh has over an IRA is the high maximum contribution you can make. There are several different types of Keoghs, but the most typical plan allows you to contribute 25% of self-employed earnings, up to $44,000 per year. (This dollar amount changes periodically.)

Good luck!