Saving for retirement 
by Allen Kutchins

Judge Learned Hand said that the American taxpayer is in no way obligated to structure his tax affairs to pay the government more than is necessary. The Internal Revenue Service has created a maze of laws and regulations that subject you to taxes when you report income properly and numerous penalties when you fail to do so. These rules deal with how you pay outside contractors, how you pay your employees, how you deposit your corporate and individual income taxes and payroll taxes. They deal with how you report money when you earn it, how you report money when you give it away, and what happens when you die.

This column will try to address the day‑to‑day practical matters that a businessman has to deal with in complying with the maze of reporting requirements generated at the federal level. The main theme throughout the articles will be how you, as an entrepreneur, can avoid penalties, pay the lowest legal amount of income taxes and have your wealth increased through pretax tax sheltered savings and after‑tax accumulations of income. We will be concerned about providing for your retirement, for your children's education, for care of elderly parents and how to pass your business on to valued employees and/or family members.

This is in addition to dealing with the daily routine of record keeping, be it by hand or computer.

Over coffee
I was at breakfast the other day with my friend and client, Terry, a local locksmith, when he asked me a question that frequently arises: "When do I start saving for retirement?" The answer to the question is really quite simple: It is never too early to start saving for retirement. You can save for retirement under present tax laws through your own individual retirement account (IRA) or if your business has sponsored a SEP (simplified employee pension plan), a Keogh or other qualified retirement and/or profit sharing plan.

You can deduct your savings from your current tax liability. As a bonus you do not pay tax on the earnings or savings until the money is taken out at retirement age. This government subsidized tax savings is the best tax shelter that exists today and is your key to financial success.

Interest rates have approached 10 percent. If you will look at Exhibit A you will see that Locksmith "A" started saving at age 19, made eight $2,000 annual contributions to his individual retirement account and at age 65 this amounted to $1,035,148. Locksmith "B," who wanted to enjoy himself and figured he'd put off saving for his rainy day until later in life, started making contributions at age 27 when locksmith "A" stopped. He made 39 annual contributions until he reached age 65. He only accumulated $805,185. As you can see, by foregoing some immediate pleasure and saving a small amount, by having tax deferred compounding of the interest that's earned, a small sum of money accumulates into a giant sum. An interesting way to figure out how long money will take to double is to divide the interest rate that you are earning into 72. For example, in our example Locksmith "A" is earning 10 percent. If we divide this into 72, his money will double in 7.2 years.

The problem is always that you don't have $2,000. If you think of this amount in smaller terms, it's a monthly savings of $166.67, weekly savings of $38.46 or a daily savings of $5.48. 1 think in those terms we can all handle this modest sum.

Terry said he didn't completely understand what was meant by tax deductible, tax deferred savings. Under present income tax laws federal tax rates are at either 15, 28 or 33 percent. When you make a contribution to your IRA or other qualified retirement plan the government allows you a tax deduction in arriving at adjusted gross income for the amount of your contribution. In our example, Locksmith "A," who put in $2,000 into his individual retirement account, was in the 28 percent tax bracket.

That means that the $2,000 he contributed to his IRA saved him immediately $560 of income taxes. That's the tax deductible part. The tax deferred part is that within the trust (the individual retirement account or the qualified retirement plan) the government does not tax the interest earned. An illustration of this is if you put $2,000 in your personal savings account and cam 10 percent or $200 interest during the year at 28 percent tax you would owe the government $56 of tax. That means that next year you have earning for you $2,144 ($2,000 invest savings + $200 interest ‑ $56 taxes). The locksmith who put the money into his IRA has $2,200 earning for him.

This is even more dramatic if you really want to look at it and say that the first locksmith who earned $2,000 paid $560 of income taxes and therefore only had $1,440 to invest.

Terry said, "Boy, that sounds exciting. What other alternatives are available for investing?" I explained that if you are selfemployed the government allows you to set up two other types of retirement plans. These are commonly known as a pension plan or a profit sharing plan. Contributions to these plans can amount to larger deductions, up to 25 percent of your income limited to $30,000 for a pension plan or 15 percent of your income limited to $30,000 for a profit sharing plan. However, if you have other full‑time employees who are working more than 1,000 hours per year, subject to certain other restrictions, you need to cover them under the same plan. If your apprentice is earning $15,000 per year and you're earning $75,000 a year, this still might be an attractive means for savings because your contribution for your apprentice will be relatively small compared to the contribution you can make for yourself. If you take the total earnings in Exhibit A and just multiply the accumulation times the increased deposit you can see that your retirement worries will be taken care of.