With all the savings and investment tax breaks that have been curtailed or rearranged in the past couple of years, it's nice to contemplate one that came through largely intact - Keogh plans for the self-employed.
Keoghs are sometimes thought of as the province of professionals on the upper rungs of the income ladder.But in fact, they can play a useful role in tax and retirement planning for anyone who has self-employment income - including moonlighters who are covered by a separate pension plan at their primary job.
The Tax Reform Act of 1986 put limits on deductions for contributions to individual retirement accounts if you are covered by a pension plan. But it set no such constraints for Keoghs.
In many ways, Keoghs are very similar to IRAs. Both are accounts set up with a custodian that allow you to make annual contributions.
As the money grows, the interest, dividends or capital gains it earns can compound tax-free until withdrawals begin, at age 591/2 or later if you want to avoid a 10 percent penalty tax.
But while IRA contributions are limited to $2,000 a year per person, the maximum for Keoghs can run as high as $30,000.
Keoghs originated in the early 1960s (they are named for Vincent Keogh, a New York congressman who sponsored the bill that created them).
Nowadays, they come in several forms. One, known as a "money purchase" plan, permits you to contribute as much as 20 percent of your self-employment income annually, up to the $30,000 ceiling.
For a second type, known as a "profit-sharing" plan, the maximum percentage is 13.043, again with the $30,000 cap.
The difference in percentage limits naturally prompts many people to opt for a money-purchase plan.
But there is another point to be considered in making the choice. Once you have set a given percentage contribution to a money-purchase plan, you are required to keep making that contribution each year.
"Your profit-sharing contribution, on the other hand, is optional," notes Albert Ellentuck at the accounting firm of Laventhol & Horwath. "If you need your money for other purposes, you're not obliged to contribute it."
Adds Michael Leonetti, a Buffalo Grove, Ill., financial planner, writing in the current edition of the American Association of Individual Investors' AAII Journal: "This is a dramatic advantage over the money purchase arrangement, because of its flexibility."
Ellentuck notes that a compromise option, known as a "paired plan," can be set up that is part money purchase and part profit-sharing.