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Retirement Planning for Professional Genealogists

By Paul Milner, March 1998 APGQ

The phrase "retirement planning" for genealogists will be regarded by many people as an oxymoron. Genealogy is a disease that often grows increasingly worse with age. No one seems to stop doing genealogy, although professionals may cease doing research for clients to concentrate on their own long-neglected family.

The membership of this association includes a wide spectrum of professionals. For some, genealogical research is a second career providing income to supplement a retirement pension. For others, the genealogical business operates in parallel to another career, with the genealogy providing a widely varying amount of income. For a few, genealogy is the only source of family income. Another small group of individuals derive no income from genealogical research, generally working for an institution. But for all, genealogy is a passion.

No matter what sources of income you have you need to save money for retirement. Saving should be seen as a major responsibility to yourself and your family. Any business that produces a profit (and the IRS expects you to eventually show a profit) can provide a source of income to help in your retirement planning.

On 5 August 1997 President Clinton signed The Taxpayer Relief Act of 1997. This Act has a major impact on many aspects of our financial lives, including retirement planning. This article comes at a time when you are probably completing your 1997 tax return. It explains current options, and discusses the changes that impact 1998 and beyond.

In this article we will examine Savings Incentive Match Plans for Employees (SIMPLE-IRA), Simplified Employee Pension Plans (SEP-IRA) and Individual Retirement Accounts (IRA). Some of the rules and options changed with the Taxpayer Relief Act. An IRA is a generic term used to describe any savings vehicle to help you, as an individual, plan for retirement. The savings vehicle could be a bank savings account, a certificate of deposit (CD), a stock or bond mutual fund, fixed or variable annuity, individual stocks, or a combination of these options. The accounts are valuable because the earnings are not taxed until withdrawn, hopefully years after you put the money into the account. It s important to understand that as a self-employed professional you can contribute to both a SEP-IRA and an IRA. The deductibility of your IRA for tax purposes will depend upon your Adjusted Gross Income (AGI). Many people remember the time prior to 1985 when you could deposit $2,000 into an IRA account and automatically take a taxable deduction on the contribution-regardless of your income level. The rules have changed over the years.


Jack and Jill are both 40 years old and want to save as much as possible for retirement. Jill earns $50,000 working for a company that has a 401k [Paul: briefly explain 401K), with a company match of 50 percent for the first 6 percent of salary contributed. Jack is self-employed as a genealogist, with no staff, earning an adjusted net income of $20,000 per year, and also has a part-time job earning $10,000 per year with no company savings plan.

The absolute minimum that Jack and Jill should be saving for retirement is the 6 percent of Jill's salary that goes into her company 401k and is matched. That extra money is free money helping her retirement savings grow. Money deducted from her salary toward her 401k also reduces her income tax liability and thus the government is providing some of the couple's retirement savings.

Let's now look at maximums. Jill can contribute up to 15 percent of her salary to a 401k which is equal to $7,500 per year. The company will automatically add an additional $750. Jack has a number of options. If we assume he is working on his 1997 tax return, up to the time of filing his 1997 return he can create a SEP-IRA for his business income. He can contribute 13.043 percent of adjusted net income, which is $2,608.60. If Jack is planning for 1998 his better option is to create a SIMPLE-IRA. He can save 92.35 percent of his adjusted net-income to a maximum of $6,000 per year, plus give himself a company match of 3 percent. In 1998, assuming the same income figures, Jack will be able to save the maximum of $6,000 plus give himself a 3 percent earnings match of an additional $600. In addition to these vehicles, both Jack and Jill can contribute $2,000 each to a Regular IRA. These contributions are not tax deductible because both Jack and Jill are active participants in an employer-sponsored retirement program, assuming Jack contributes to a SEP-IRA or a SIMPLE-IRA.
In 1998 Jack and Jill will have the option of contributing to a Regular IRA or a Roth IRA. For non-deductible contributions, the Roth IRA is the better option, because the earnings are tax-free after age 59?, while in a Regular IRA the earnings are tax-deferred. Jack and Jill could thus be saving $14,858.60 in 1997 for retirement and increasing it to $18,850 for 1998 and beyond. If they wanted to save more with tax-deferred growth, then contributions can be made to variable or fixed annuities. Alternatively, they could save money in stocks or bonds, individually or in mutual funds, paying the taxes each year and having access to their funds.
With this example in mind let us examine the SEP-IRA, the SIMPLE-IRA, and then each type of IRA for individuals. We will look first at the laws as they apply to your 1997 tax return, then at the changes for 1998 and following for each type of IRA.

Simplified Employee Pension Plan (SEP-IRA)

The SEP-IRA is a good retirement savings vehicle for the vast majority of sole-proprietor, self-employed, professional genealogists. The SEP-IRA is an easy to administer, low-cost retirement plan. You can start one now, up to the time of filing your 1997 tax return.
A SEP-IRA allows you to make deductions up to $24,000 (for 1997) per year for yourself and each eligible employee, vary your annual contribution level to accommodate changing business needs, and avoid the annual reporting requirements and costs associated with other retirement plans. If you have employees, contributions also need to be made on their behalf, although there are some exceptions. See your investment advisor if you have employees and want to start a plan.
Your contribution for your self-employment income is based on your net income, being defined as gross income, minus business expenses, minus any employee pension contributions, and minus one-half of your SECA (Self-Employed Contributions Tax). Your maximum contribution works out to be 13.043 percent of adjusted net income. This contribution is tax deductible, you pay no Social Security or unemployment taxes on the contributions, there is no annual reporting to the IRS or Department of Labor and you are fully invested immediately. Upon investing, all Regular IRA rules apply in terms of withdrawals and penalties.

Savings Incentive Match Plan For Employees (SIMPLE-IRA)

A SIMPLE-IRA is a new kind of retirement plan created by the Small Business Job Protection Act of 1996 to enable small businesses to provide effective retirement benefits for employees. This also applies if you, as company owner, are the only employee.
The plan allows employees and owners to save for retirement through payroll deductions on a tax-favored basis. It also involves a mandatory employer contribution, either in the form of a matching contribution or a nonelective contribution. For most professional genealogists who are self-employed, contributions can be made to the SIMPLE-IRA during the year with a final payment being made as adjusted net income is determined at tax reporting time. The SIMPLE-IRA is easy to establish and maintain, with no administrative costs other than the mandatory contribution. Your contributions are made on a pre-tax basis and your own matching allocation is a tax-deductible expense. The employer has the choice of matching an employee's deferral dollar for dollar to a maximum of 3 percent of salary, or contributing 2 percent of salary for each employee whether they elect to defer money or not. If you are both owner and only employee then the 3 percent match will give you the maximum benefit.
As with the SEP-IRA the contributions are tax deductible, you pay no Social Security or unemployment taxes on the contributions, there is no annual reporting to the IRS or Department of Labor and you are fully invested immediately.
Generally, lower paid owners will be able to contribute more to a SIMPLE-IRA than a SEP-IRA. The break-even point is $50,000. Any eligible employees will have an impact on the choice of plan and this will depend upon your personal and financial goals. You need to consult your financial advisor to study the full impact if you have employees.

Regular IRA

You can make a contribution to your 1997 IRA to the lesser of $2,000 or 100 percent of earned income (or alimony) if less, up to the time of filing your tax return. If you or your spouse participated in any form of pension plan (including 401k, Profit Sharing Plan, TSA, SIMPLE, and SEP) the tax deductibility of the IRA contribution for both you and your spouse depends on your Adjusted Gross Income (AGI). For single people, the contribution is fully deductible if the AGI is below $25,000 and not deductible above $35,000. For married people, filing jointly, the contribution is fully deductible when the AGI is below $40,000 and not deductible above $50,000. For couples filing separately, the contribution is not deductible if the AGI exceeds $10,000. The deductibility is on a graded scale if the AGI is between the upper and lower figures. I encourage people to save, but not to mix deductible and non-deductible contributions within one IRA. [use as pull quote]
With a regular IRA you cannot make contributions after age 70 and you need to take distributions from the account equal to or exceeding the Required Minimum Distribution (RMD) rules. These rules efine the minimum amount of money you need to take out of the IRA based on your life expectancy. The penalties are high if these rules are not met.
The 1997 Act raises the deductibility limits over the next ten years, changes the eligibility rules, but does not change the $2,000 contribution limit.

Spousal IRA

If you are married and your spouse has very little or no compensation for the year, you may establish a spousal IRA, with the non-employed spouse as owner. If your spouse then becomes employed, the spousal IRA can be treated as a regular IRA. You and your spouse can contribute up to a maximum of $4,000 total to your regular IRAs with no more than $2,000 being contributed to one account as long as your combined earned income exceeds $4,000. You can split the total any way you choose.

Roth IRA

This is a new IRA that begins in 1998. This account will only accept non-deductible IRA contributions. Total contributions to a Regular IRA and a Roth IRA are based on the usual IRA limitations of the lesser of $2,000 or 100 percent of earned income (or alimony). You therefore cannot contribute $2,000 to a Regular IRA and another $2,000 for yourself in a Roth IRA.
You can continue to make contributions to a Roth IRA after age 70 providing you have earned income or receive alimony. You are not required to take distributions at 70. The option to make contributions is phased out if adjusted gross income exceeds $95,000 for single people, $150,000 for married couples filing jointly, and no contribution can be made for married couples filing separately.
The big advantage of the Roth IRA is that the earnings are tax free, providing it meets the criteria for a qualified distribution. This means that distributions may be taken from the Roth IRA after five years since the first Roth IRA contribution, or after age 59? whichever is longer. The earnings can be withdrawn tax-free from the Roth IRA before five years or age 59? if there is a death, disability or you are a first-time homebuyer. If these qualifications are not met then the earnings are taxable and may be subject to the 10 percent IRS penalty tax. Roth IRA contributions are always distributed before the taxable interest.
Money in a Regular IRA can be rolled into a Roth IRA without the usual 10 percent penalty if the tax payer is under age 59, and providing the AGI is below $100,000 for both married couples filing jointly and for singles. Couples filing separately cannot do a rollover. However, the taxes must be paid on the amounts taken from the Regular IRA. While the money is in the Roth IRA the interest will not be taxed. Special provisions apply for rollovers in 1998 only, whereby the income taxes can be spread over four years - 1998, 1999, 2000 and 2001. The Roth IRA is a great benefit to savers seeking to avoid tax on earnings. However, the decision to do a rollover of a Regular IRA into a Roth IRA and pay the taxes is a complicated one not to be taken lightly. The benefits will depend upon your expected post-59 tax bracket, and how many years you can let your money grow. The younger you are the more likely that this option will be of benefit to you. Before making this decision see your financial advisor.

Once You Have Fully Funded Your Retirement Accounts Then What?

Let's assume you and your spouse have fully funded your pension accounts through work, your genealogy business, and your IRAs, and you want to save more for retirement. When you reach this stage you have a number of options. Assuming the goal is to continue with tax deferred growth, the best option is to look at variable or fixed annuities. The choice between variable and fixed depends upon your tolerance for risk and where you have the rest of your portfolio invested.
An alternative is to save your money in stocks and bonds or mutual funds. You will pay taxes on income each year at your regular tax rate, but long-term capital gains will be taxed at the new 20 percent rate.

What to Do Now

Doing nothing is the worst thing that you can do. You need to be putting money aside for your retirement so that it has time to grow. Examine your current situation to see what can be done now before filing your 1997 tax return. Then plan for what you are going to do in 1998 to boost your retirement savings. Setting money aside each month is much easier than coming up with a lump sum at the end of the year. In fact, the best thing to do is fund your 1998 retirement plan now, not in early 1999, so that you have an extra year for that money to grow.
There are lots of options and you are encouraged to see your financial advisor now to determine what is the best course of action for you. Enjoy your savings journey by starting early.

About the Author

Paul Milner is a Registered Representative for Lutheran Brotherhood, the largest fraternal benefit society in the United States. In this capacity he works with individuals to achieve their financial goals, meeting all investment and insurance needs. As a professional genealogist he specializes in research in the British Isles and Chicago area records. He is the President of the British Interest Group of Wisconsin and Illinois (BIGWILL), and a board member of the Federation of Genealogical Societies and the Genealogical Speakers Guild.

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