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No 401(k)? No Problem! 213 If a self-employed individual opens a Keogh plan and later hires employees, the employer must include them also. The employer is permitted to require that employees be 21 and have worked for the firm for one year to be eligible. The IRS defines a year of service as one in which an employee works at least 1,000 hours, so some part-time employees might never be covered by a plan that includes a service retirement. But retirement plans do help to retain employees, and some employ- ers design their plans to permit part-timers to participate. It's possible for employees to borrow from a Keogh, but the privilege currently is not granted to the owner/employer. As of January 1, 2002, the new tax law eliminates the prohibited transaction rule, and an owner may also borrow from the Keogh. A borrowing provision must be contained in the plan document. A Keogh plan behaves like any other plan when you retire. You can take a lump-sum distribution and taxes will be due, but the Keogh also qualifies for 10-year averaging of taxes. This method allows you to calculate your taxes at a lower rate, but the taxes are all due in the year you have taken your distribution. Our Advice Keogh plans are the most complicated of the self-employed plans, but what they offer is the ability to contribute more than the other plans by boosting your maximum contribution to the lesser of 25 percent or $35,000. That extra tax deferral may be worth the extra paperwork. The money can be distributed over a period of years, or you can roll it into an IRA. You can also get your money out of a Keogh early when you reach age 55 and retire. An owner/employer must terminate the plan to get at her money, if she hasn't retired. Remember, Rule 72(t) in Chapter 18, "Cashing In or Out of Your 401(k)," applies here. If you die before beginning distributions, your spouse has the ability to roll the distribution into his IRA. SEP-IRAs The SEP-IRA is both a pension plan and an IRA. It is a Simplified Employee Pension plan that uses an IRA format. Got all that? Of all the self-employed plans, it is by far the easiest to use and the easiest to set up. Again, a call to your favorite mutual fund company will get you an application as well as help in calculating how much you are eligible to contribute each year. The maximum annual contribution for each employee under a SEP-IRA is 15 percent of compen- sation or $25,500 (2001 limit), whichever is less. The maximum amount of compensation that can be used in determining contributions is $170,000, but this limit will increase to $200,000 in 2002 and thereafter will be indexed for inflation. If you are self-employed and contribute to your own SEP-IRA, special rules apply when figuring your maximum contribution to your own account. (See IRS Pub- lication 590 for the details.) Contributions for any year must be made by the due date of the em- ployer's tax return.