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Free Agent Nation By Stephen J. Butler

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The book, Free Agent Nation by Daniel Pink cleverly contrasts Gregory Peck in the movie "Man in a Grey Flannel Suit" with Tom Cruise in "Jerry McGuire." Peck was trapped in the corporate world of the '50's, while modern-day Cruise breaks free to establish himself as a free agent. As he responds to the "show me the money" cheer that the movie has made famous, Cruise personifies a trend that is changing the way Americans participate in the economy. It may prove to be a systemic change as evolutionary as the industrial revolution itself.

Free Agent Nation documents the extent to which the American workforce is operating as a collection of individual one-person businesses to a greater extent than ever before. For those unwillingly sloughed off by the corporate world, it may be reassuring to know that there are several advantages of free agent status that many have not considered. For those who have long-since made the break, there are some new retirement tax-savings opportunities that this year's new tax laws have created.

But first, let's look at some statistics. According to the Ford Foundation, there are about 37 million "freelancers, office temps, and independent contractors." This represents about 30 percent of the workforce or almost twice the percentage of people who work in government or manufacturing. In California, only one-third of all workers have a traditional job?a full-time, year-round position with one employer. Pink points out that "two out of three Californians lack the employment arrangement on which nearly all American laws, taxes, and social assumptions are based. This hardly comes as news to me. For many years, pension laws aimed at the corporate environment have generated countless "loopholes for the little guy." When laws aimed at "big corporations" are applied to simple one-person companies they can generate tremendous tax-deferral and investment opportunities.

One simple example is the issue of loans from retirement plans. Many employees who have been laid off from jobs may have 401(k) loans that need to be repaid within ninety days. Otherwise, the entire outstanding balance becomes taxable as income and can trigger a 10% penalty as well. By setting up a one-person business with its own retirement plan, the employee can now roll his or her account balance, including the loan, into the new plan. The traditional rollover into an IRA would not have accommodated the loan. Before 2002, a small, unincorporated business could have offered a retirement plan, but loans to business owners were not permitted.

In another example, a successful consultant or software engineer working as a one-person shop with, say $200,000 of income could add their spouse to the payroll for $40,000 of that income. Then, the two of them could contribute a combined total of $50,000 into the plan or $25,000 each. There is no longer a percentage limit on contributions for any one individual, but the maximum contribution is limited to an amount equal to 25% of total company payroll. The maximum dollar limit is now $40,000 per person. In addition, this couple could each contribute an additional $11,000 into the 401(k) portion of the plan for a combined total pension contribution of $72,000.

I have left out many of the details in these examples, but the points should be clear. For those approaching retirement who want to accelerate their contribution amounts, the free agent phenomenon may offer some opportunities that many of us would have overlooked. For those who have lost jobs and are considering taxable withdrawals from rollover IRA accounts, the taxes and penalties may be entirely unnecessary if you adopt a plan that allows you to borrow from your account without triggering a taxable event.

The retirement plans that offer these levels of flexibility are not the so-called "Simplified Employer Pensions" or SEP's offered by the brokerage and mutual fund industry. These are full-blown retirement plans typically designed and administered by retirement plan administration companies. Your CPA can help you locate a reputable firm. The set-up cost can range between $750 and $1,500 and the annual costs are minimal until the plan reaches $100,000 in assets.

With regard to the unsettling economic reports and the stock market of late, I can only say that these events represent more opportunity to buy great value at bargain prices. The prices may even get better before we start a long uphill climb, but steady infusions of inbound money into well-designed retirement plans will reward the patient many times over. For what it may be worth, those of us continuing to stay the course are in very good company. Warren Buffet is on the prowl and buying heavily into some deeply depressed stocks, and I'm certain he isn't losing a wink of sleep. He doesn't buy anything that he doesn't plan to keep for at least ten years. Those of us who call ourselves "long-term investors" need to remember "long-term" is ten years?not just the two we have endured recently.